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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



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|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------------



For the quarterly period ended March 31, 2006



or



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------



For the transition period from              to



Commission File No. 001-03040



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QWEST CORPORATION

(Exact name of registrant as specified in its charter)



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|                                                              |  |                                    
|------------------------------------------------------------- |  | -----------------------------------
|Colorado                                                      |  | 84-0273800                         
|(State or other jurisdiction ofincorporation or organization) |  | (I.R.S. EmployerIdentification No.)
|                                                              | 
|1801 California Street, Denver, Colorado                      |  | 80202                              
|(Address of principal executive offices)                      |  | (Zip Code)                         



(303) 992-1400

(Registrants telephone number, including area code)



N/A

(Former name, former address and former fiscal year, if changed since last report)



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THE REGISTRANT, A WHOLLY OWNED SUBSIDIARY OF QWEST COMMUNICATIONS
INTERNATIONAL INC., MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTIONS H(1) (a) AND (b) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM WITH REDUCED DISCLOSURE FORMAT.



Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.    Yes  x    No ̈



Indicate by check mark
whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check One):



|                         |  |                    |  |                         
|------------------------ |  | ------------------ |  | ------------------------
|Large accelerated filer ̈ |  | Accelerated filer ̈ |  | Non-accelerated filer  x



Indicate by check mark
whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes ̈No  x



On April 30, 2006, one share of Qwest Corporation common stock was outstanding.



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##### Table of Contents

QWEST CORPORATION



FORM 10-Q



TABLE OF CONTENTS



|     |  |                                                                                                        |  |     
|---- |  | ------------------------------------------------------------------------------------------------------ |  | ----
|Item |  |                                                                                                        |  | Page
|     |  |                                                                                                       
|     |  | Glossary of Terms                                                                                      |  | 3   
|     |  |                                                                                                       
|     |  | PART IFINANCIAL INFORMATION                                                                           |  |     
|     |  |                                                                                                       
|1.   |  | Financial Statements                                                                                   |  | 5   
|     |  |                                                                                                       
|     |  | Condensed Consolidated Statements of OperationsThree months ended March 31, 2006 and 2005 (unaudited) |  | 5   
|     |  |                                                                                                       
|     |  | Condensed Consolidated Balance SheetsMarch 31, 2006 and December 31, 2005 (unaudited)                 |  | 6   
|     |  |                                                                                                       
|     |  | Condensed Consolidated Statements of Cash FlowsThree months ended March 31, 2006 and 2005 (unaudited) |  | 7   
|     |  |                                                                                                       
|     |  | Notes to Condensed Consolidated Financial Statements (unaudited)                                       |  | 8   
|     |  |                                                                                                       
|2.   |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                  |  | 20  
|     |  |                                                                                                       
|3.   |  | Quantitative and Qualitative Disclosures About Market Risk                                             |  | 29  
|     |  |                                                                                                       
|4.   |  | Controls and Procedures                                                                                |  | 29  
|     |  |                                                                                                       
|     |  | PART IIOTHER INFORMATION                                                                              |  |     
|     |  |                                                                                                       
|1.   |  | Legal Proceedings                                                                                      |  | 30  
|     |  |                                                                                                       
|1A.  |  | Risk Factors                                                                                           |  | 30  
|     |  |                                                                                                       
|6.   |  | Exhibits                                                                                               |  | 36  
|     |  |                                                                                                       
|     |  | Signature Page                                                                                         |  | 38  



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GLOSSARY OF TERMS



Our industry
uses many terms and acronyms that may not be familiar to you. To assist you in reading this document, we have provided below definitions of some of these terms.



| |  |  | Access Lines. Telephone lines reaching from the customers premises to a connection with the public switched telephone network. When we refer to our access lines we mean
all our mass markets, wholesale and business access lines, including those used by us and our affiliates.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Asynchronous Transfer Mode (ATM). A broadband, network transport service utilizing data switches that provides a fast, efficient way to move large quantities of information.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Competitive Local Exchange Carriers (CLECs). Telecommunications providers that compete with us in providing local voice services in our local service area.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Data Integration. Voice and data telecommunications customer premises equipment (CPE) and associated professional services, including network management, the installation and
maintenance of data equipment and the building of proprietary fiber-optic broadband networks, for our governmental and business customers.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Frame Relay. A high speed data switching technology primarily used to interconnect multiple local networks.
| | - |  | -----------------------------------------------------------------------------------------------------------



| |  |  | Incumbent Local Exchange Carrier (ILEC). A traditional telecommunications provider, such as Qwest Corporation, that, prior to the Telecommunications Act of 1996, had the
exclusive right and responsibility for providing local telecommunications services in its local service area.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Integrated Services Digital Network (ISDN). A telecommunications standard that uses digital transmission technology to support voice, video and data communications
applications over regular telephone lines.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Interexchange Carriers (IXCs). Telecommunications providers that provide long-distance services to end-users by handling calls that extend beyond a customers
local exchange service area.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | InterLATA long-distance services. Telecommunications services, including 800 services, that cross LATA boundaries.
| | - |  | --------------------------------------------------------------------------------------------------------------------



| |  |  | Internet Dial Access. Provides ISPs and business customers with a comprehensive, reliable and cost-effective dial-up network infrastructure.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Internet Protocol (IP). Those protocols that facilitate transferring information in packets of data and that enable each packet in a transmission to tell the data
switches it encounters where it is headed and enables the computers on each end to confirm that message has been accurately transmitted and received.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Internet Service Providers (ISPs). Businesses that provide Internet access to retail customers.
| | - |  | -----------------------------------------------------------------------------------------------



| |  |  | IntraLATA long-distance services. These services include calls that terminate outside a callers local calling area but within their LATA, including wide area
telecommunications service or 800 services for customers with geographically highly concentrated demand.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Local Access Transport Area (LATA).A geographical area associated with the provision of telecommunications services by local exchange and long distance carriers. There are
163 LATAs in the United States, of which 27 are in our 14 state local service area.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Local Calling Area. A geographical area, usually smaller than a LATA, within which a customer can make telephone calls without incurring long-distance charges. Multiple local
calling areas generally make up a LATA.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Private Lines. Direct circuits or channels specifically dedicated to the use of an end-user organization for the purpose of directly connecting two or more sites.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | Public Switched Telephone Network (PSTN). The worldwide voice telephone network that is accessible to every person with a telephone equipped with dial tone.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Unbundled Network Elements (UNEs). Discrete elements of our network that are sold or leased to competitive telecommunications providers and that may be combined to provide
their retail telecommunications services.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Virtual Private Network (VPN). A private network that operates securely within a public network (such as the Internet) by means of encrypting transmissions.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Voice over Internet Protocol (VoIP). An application that provides real-time, two-way voice capability originating in the Internet protocol over a broadband connection.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Web Hosting. The providing of space, power and bandwidth in data centers for hosting of customers Internet equipment as well as related services.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Wide Area Network (WAN).A communications network that covers a wide geographic area, such as a state or country. A WAN typically extends a local area network outside the
building, over telephone common carrier lines to link to other local area networks in remote locations, such as branch offices or at-home workers and telecommuters.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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PART I. FINANCIAL INFORMATION



ITEM 1. FINANCIAL STATEMENTS



QWEST CORPORATION



CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)



|                                                              |  |                             |       |   |      |   |       |  
|------------------------------------------------------------- |  | --------------------------- | ----- | - | ---- | - | ----- | -
|                                                              |  | Three Months EndedMarch 31, |      
|                                                              |  | 2006                        |       |   | 2005 |  
|                                                              |  | (Dollars in millions)       |      
|Operating revenue                                             |  | $                           | 2,241 |   |      | $ | 2,268 |  
|Operating revenueaffiliates                                  |  |                             | 237   |   |      |   | 283   |  
|                                                              |  |                             |       |   |      |   |       |  
|Total operating revenue                                       |  |                             | 2,478 |   |      |   | 2,551 |  
|                                                              |  |                            
|Operating expenses:                                           |  |                             |       |   |      |   |       |  
|Cost of sales (exclusive of depreciation and amortization)    |  |                             | 518   |   |      |   | 533   |  
|Cost of salesaffiliates                                      |  |                             | 60    |   |      |   | 53    |  
|Selling, general and administrative                           |  |                             | 429   |   |      |   | 431   |  
|Selling, general and administrativeaffiliates                |  |                             | 272   |   |      |   | 279   |  
|Depreciation                                                  |  |                             | 525   |   |      |   | 579   |  
|Capitalized software and other intangible assets amortization |  |                             | 71    |   |      |   | 91    |  
|                                                              |  |                             |       |   |      |   |       |  
|Total operating expenses                                      |  |                             | 1,875 |   |      |   | 1,966 |  
|                                                              |  |                             |       |   |      |   |       |  
|Other expensenet:                                            |  |                             |       |   |      |   |       |  
|Interest expensenet                                          |  |                             | 153   |   |      |   | 149   |  
|Other (income) expensenet                                    |  |                             | (1    | ) |      |   | 13    |  
|                                                              |  |                             |       |   |      |   |       |  
|Total other expensenet                                       |  |                             | 152   |   |      |   | 162   |  
|                                                              |  |                             |       |   |      |   |       |  
|Income before income taxes                                    |  |                             | 451   |   |      |   | 423   |  
|Income tax expense                                            |  |                             | (167  | ) |      |   | (161  | )
|                                                              |  |                             |       |   |      |   |       |  
|Net income                                                    |  | $                           | 284   |   |      | $ | 262   |  
|                                                              |  |                             |       |   |      |   |       |  



The accompanying notes
are an integral part of these condensed consolidated financial statements.



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QWEST CORPORATION



CONDENSED
CONSOLIDATED BALANCE SHEETS

(UNAUDITED)



|                                                                                       |  |                       |        |   |                  |   |        |  
|-------------------------------------------------------------------------------------- |  | --------------------- | ------ | - | ---------------- | - | ------ | -
|                                                                                       |  | March 31,2006         |        |   | December 31,2005 |  
|                                                                                       |  | (Dollars in millions) |       
|ASSETS                                                                                 |  |                       |        |   |                  |   |        |  
|Current assets:                                                                        |  |                       |        |   |                  |   |        |  
|Cash and cash equivalents                                                              |  | $                     | 218    |   |                  | $ | 160    |  
|Short-term investments                                                                 |  |                       | 41     |   |                  |   | 8      |  
|Accounts receivable (less allowance of $62 and $66, respectively)                      |  |                       | 1,019  |   |                  |   | 1,019  |  
|Accounts receivableaffiliates                                                         |  |                       | 108    |   |                  |   | 127    |  
|Deferred income taxes                                                                  |  |                       | 96     |   |                  |   | 98     |  
|Prepaid expenses and other current assets                                              |  |                       | 217    |   |                  |   | 218    |  
|                                                                                       |  |                       |        |   |                  |   |        |  
|Total current assets                                                                   |  |                       | 1,699  |   |                  |   | 1,630  |  
|Property, plant and equipmentnet                                                      |  |                       | 13,767 |   |                  |   | 14,037 |  
|Capitalized software and other intangible assetsnet                                   |  |                       | 551    |   |                  |   | 594    |  
|Prepaid pension asset                                                                  |  |                       | 1,001  |   |                  |   | 1,013  |  
|Other assets                                                                           |  |                       | 292    |   |                  |   | 297    |  
|                                                                                       |  |                       |        |   |                  |   |        |  
|Total assets                                                                           |  | $                     | 17,310 |   |                  | $ | 17,571 |  
|                                                                                       |  |                       |        |   |                  |   |        |  
|                                                                                       |  |                      
|LIABILITIES AND STOCKHOLDERS EQUITY                                                   |  |                       |        |   |                  |   |        |  
|Current liabilities:                                                                   |  |                       |        |   |                  |   |        |  
|Current borrowings                                                                     |  | $                     | 90     |   |                  | $ | 1      |  
|Accounts payable                                                                       |  |                       | 396    |   |                  |   | 454    |  
|Accounts payableaffiliates                                                            |  |                       | 822    |   |                  |   | 609    |  
|Dividends payableQSC                                                                  |  |                       | 600    |   |                  |   | 126    |  
|Accrued expenses and other current liabilities                                         |  |                       | 639    |   |                  |   | 685    |  
|Deferred revenue and advance billings                                                  |  |                       | 485    |   |                  |   | 492    |  
|                                                                                       |  |                       |        |   |                  |   |        |  
|Total current liabilities                                                              |  |                       | 3,032  |   |                  |   | 2,367  |  
|Long-term borrowings (net of unamortized debt discount of $128 and $129, respectively) |  |                       | 7,574  |   |                  |   | 7,664  |  
|Post-retirement and other post-employment benefit obligations                          |  |                       | 2,834  |   |                  |   | 2,851  |  
|Deferred revenue                                                                       |  |                       | 188    |   |                  |   | 193    |  
|Deferred income taxes                                                                  |  |                       | 1,790  |   |                  |   | 1,881  |  
|Other long-term liabilities                                                            |  |                       | 253    |   |                  |   | 279    |  
|                                                                                       |  |                       |        |   |                  |   |        |  
|Total liabilities                                                                      |  |                       | 15,671 |   |                  |   | 15,235 |  
|                                                                                       |  |                       |        |   |                  |   |        |  
|Commitments and contingencies (Note 4)                                                 |  |                       |        |   |                  |   |        |  
|Stockholders equity:                                                                  |  |                       |        |   |                  |   |        |  
|Common stockone share without par value, owned by QSC                                 |  |                       | 10,175 |   |                  |   | 10,157 |  
|Accumulated deficit                                                                    |  |                       | (8,536 | ) |                  |   | (7,821 | )
|                                                                                       |  |                       |        |   |                  |   |        |  
|Total stockholders equity                                                             |  |                       | 1,639  |   |                  |   | 2,336  |  
|                                                                                       |  |                       |        |   |                  |   |        |  
|Total liabilities and stockholders equity                                             |  | $                     | 17,310 |   |                  | $ | 17,571 |  
|                                                                                       |  |                       |        |   |                  |   |        |  



The accompanying notes
are an integral part of these condensed consolidated financial statements.



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QWEST CORPORATION



CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)



|                                                                              |  |                             |      |   |      |   |       |  
|----------------------------------------------------------------------------- |  | --------------------------- | ---- | - | ---- | - | ----- | -
|                                                                              |  | Three Months EndedMarch 31, |     
|                                                                              |  | 2006                        |      |   | 2005 |  
|                                                                              |  | (Dollars in millions)       |     
|OPERATING ACTIVITIES                                                          |  |                             |      |   |      |   |       |  
|Net income                                                                    |  | $                           | 284  |   |      | $ | 262   |  
|Adjustments to reconcile net income to cash provided by operating activities: |  |                             |      |   |      |   |       |  
|Depreciation and amortization                                                 |  |                             | 596  |   |      |   | 670   |  
|Provision for bad debtsnet                                                   |  |                             | 20   |   |      |   | 23    |  
|Deferred income taxes                                                         |  |                             | (90  | ) |      |   | 52    |  
|Other non-cash chargesnet                                                    |  |                             | 4    |   |      |   | 4     |  
|Changes in operating assets and liabilities:                                  |  |                             |      |   |      |   |       |  
|Accounts receivable                                                           |  |                             | (20  | ) |      |   | 11    |  
|Accounts receivableaffiliates                                                |  |                             | 19   |   |      |   | 5     |  
|Prepaid and other current assets                                              |  |                             | 1    |   |      |   | (14   | )
|Accounts payable and accrued expenses                                         |  |                             | (105 | ) |      |   | (72   | )
|Accounts payableaffiliates                                                   |  |                             | 213  |   |      |   | 147   |  
|Deferred revenue and advance billings                                         |  |                             | (12  | ) |      |   | (20   | )
|Other non-current assets and liabilities                                      |  |                             | (27  | ) |      |   | 34    |  
|                                                                              |  |                             |      |   |      |   |       |  
|Cash provided by operating activities                                         |  |                             | 883  |   |      |   | 1,102 |  
|                                                                              |  |                             |      |   |      |   |       |  
|INVESTING ACTIVITIES                                                          |  |                             |      |   |      |   |       |  
|Expenditures for property and equipment and intangible assets                 |  |                             | (292 | ) |      |   | (250  | )
|Interest in net purchases of investments managed by QSC                       |  |                             | (33  | ) |      |   | (41   | )
|Proceeds from sale of property and equipment                                  |  |                             | 26   |   |      |   |      |  
|                                                                              |  |                             |      |   |      |   |       |  
|Cash used for investing activities                                            |  |                             | (299 | ) |      |   | (291  | )
|                                                                              |  |                             |      |   |      |   |       |  
|FINANCING ACTIVITIES                                                          |  |                             |      |   |      |   |       |  
|Repayments of long-term borrowings, including current maturities              |  |                             |     |   |      |   | (2    | )
|Dividends paid to QSC                                                         |  |                             | (526 | ) |      |   | (762  | )
|                                                                              |  |                             |      |   |      |   |       |  
|Cash used for financing activities                                            |  |                             | (526 | ) |      |   | (764  | )
|                                                                              |  |                             |      |   |      |   |       |  
|CASH AND CASH EQUIVALENTS                                                     |  |                             |      |   |      |   |       |  
|Increase in cash and cash equivalents                                         |  |                             | 58   |   |      |   | 47    |  
|Beginning balance                                                             |  |                             | 160  |   |      |   | 342   |  
|                                                                              |  |                             |      |   |      |   |       |  
|Ending balance                                                                |  | $                           | 218  |   |      | $ | 389   |  
|                                                                              |  |                             |      |   |      |   |       |  



The accompanying notes
are an integral part of these condensed consolidated financial statements.



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QWEST CORPORATION



NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2006

(UNAUDITED)



Unless the context requires otherwise, references in this report to QC refer to Qwest Corporation, references to Qwest,
we, us, the Company and our refer to Qwest Corporation and its consolidated subsidiaries, and references to QCII refer to our ultimate parent company, Qwest Communications International
Inc., and its consolidated subsidiaries.



Note 1: Basis of
Presentation



These condensed consolidated interim
financial statements are unaudited and are prepared in accordance with the instructions for Form 10-Q. In compliance with those instructions, certain information and footnote disclosures normally included in consolidated financial statements
prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) have been condensed or omitted.



In the opinion of management, these statements include all the adjustments necessary to fairly present our condensed consolidated results of operations,
financial position and cash flows as of March 31, 2006 and for all periods presented. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in our annual
report on Form 10-K for the year ended December 31, 2005 (the 2005 Form 10-K). The condensed consolidated results of operations and the condensed consolidated statement of cash flows for the three month period ended
March 31, 2006 are not necessarily indicative of the results or cash flows expected for the full year.



Use of estimates



Our condensed consolidated financial statements are prepared in accordance with GAAP. These accounting principles require us to make certain estimates,
judgments and assumptions. We believe that the estimates, judgments and assumptions made when accounting for items and matters such as long-term contracts, customer retention patterns, allowance for bad debts, depreciation, amortization, asset
valuations, internal labor capitalization rates, recoverability of assets, impairment assessments, employee benefits, taxes, reserves and other provisions and contingencies are reasonable, based on information available at the time they are made.
These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities as of the date of the condensed consolidated financial statements, as well as the reported amounts of revenue and expenses during the periods
presented. We also assess potential losses in relation to threatened or pending litigation and, if a loss is considered probable and the amount can be reasonably estimated, we recognize an expense for the estimated loss. Actual results could differ
from these estimates. See Note 4Commitments and Contingencies.



Reclassifications



Certain prior period balances have been reclassified to conform to the current presentation, including a reclassification of $21 million in expenses between selling, general and administrationaffiliate and selling, general and
administration for the three months ended March 31, 2005.



Depreciation and amortization



Property, plant and equipment are shown net of depreciation on our condensed consolidated balance sheets. As of March 31, 2006 and December 31, 2005, accumulated depreciation was $29.6 billion and $29.3 billion, respectively.



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QWEST CORPORATION



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

FOR THE THREE MONTHS ENDED MARCH 31, 2006

(UNAUDITED)



Capitalized software and other intangible assets are shown net of amortization on our condensed
consolidated balance sheets. Accumulated amortization was $947 million and $861 million as of March 31, 2006 and December 31, 2005, respectively.



Recently adopted accounting pronouncements



In May 2005, the Financial Accounting Standards Board (FASB), as part of an effort to conform to international accounting standards,
issued Statement of Financial Accounting Standards (SFAS) No. 154, Accounting Changes and Error Corrections (SFAS No. 154), which was effective for us beginning on January 1, 2006. SFAS No. 154
requires that all voluntary changes in accounting principles be retrospectively applied to prior financial statements as if that principle had always been used, unless it is impracticable to do so. When it is impracticable to calculate the effects
on all prior periods, SFAS No. 154 requires that the new principle be applied to the earliest period practicable. The adoption of SFAS No. 154 has not had a material effect on our financial position or results of operations.



Stock-based compensation



Effective January 1, 2006, we adopted SFAS No. 123(R), Share-Based
Payments (SFAS No. 123(R)), which revises SFAS No. 123, Accounting for Stock-Based Compensation. Prior to 2006, we accounted for awards of QCII stock granted to our employees under the intrinsic-value recognition and
measurement principles of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB No. 25). However, SFAS No. 123(R) requires that compensation expense be measured using estimates of the fair
value of all stock-based awards and applies to new awards and to awards modified, repurchased, or cancelled after December 31, 2005, as well as to the unvested portion of awards outstanding as of January 1, 2006.



We are applying the modified prospective method for recognizing
the expense over the remaining vesting period for awards that were outstanding but unvested at January 1, 2006. Under the modified prospective method, we have not adjusted the financial statements for periods ending prior to December 31, 2005.
Compensation cost arising from stock-based awards is recognized as expense using the straight-line method over the vesting period and was less than $1 million for the three months ended March 31, 2006.



We purchase services from our parent, such as marketing and advertising,
product and technical services as well as general support services, and our affiliates charge us for these services based on market price or fully distributed cost (FDC). Most services are priced by applying an FDC methodology. FDC rates
are determined using salary rates, including factors for taxes, employee benefits, facilities and overhead costs. These services are charged to us based on direct assignment whenever possible. If costs cannot be directly assigned, they are allocated
among all affiliates including QC based upon cost causative measures, or if no cost causative measure is available, based on a general allocator. Occasionally Qwest will adjust the basis for allocating the costs of a shared service among affiliates.
Because of this allocation process, our direct parent increased its billings to us during the three months ended March 31, 2006 by $3 million due to the stock-based compensation it recorded during that period. As of March 31, 2006, QCII had a total
$67 million of total unrecognized compensation cost related to unvested stock-based awards, which it will recognize over the remaining vesting terms which have a weighted average of 3.0 years, and because our direct parent will continue to record
such stock-based compensation, it will continue to allocate a portion of such costs to us. However, based on the many factors that effect the allocation, the amount that is ultimately allocated to us may fluctuate. Also, because of the significance
of the services we purchase from our parent, the direct stock-based compensation recorded by us is not necessarily indicative of the costs we would have incurred had we operated as a stand-alone entity during the periods presented.



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QWEST CORPORATION



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

FOR THE THREE MONTHS ENDED MARCH 31, 2006

(UNAUDITED)



The following table illustrates the effect on net income and earnings per share for the three months
ended March 31, 2005 as if our stock-based compensation had been determined based on the fair value at the grant dates:



|                                                                                                                                                |  |                                   |    
|----------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------------- | ---
|                                                                                                                                                |  | Three Months Ended March 31, 2005
|                                                                                                                                                |  | (Dollars in millions)            
|Net income:                                                                                                                                     |  |                                   |    
|As reported                                                                                                                                     |  | $                                 | 262
|Deduct: Total stock-based employee compensation expense determined under the fair-value-based method for all awards, net of related tax
effects |  |                                   | 6  
|                                                                                                                                                |  |                                   |    
|Pro forma net income                                                                                                                            |  | $                                 | 256
|                                                                                                                                                |  |                                   |    



Note 2: Borrowings



As of March 31, 2006 and December 31, 2005, our
borrowings, net of discounts and premiums, consisted of the following:



|                                             |  |                       |       |                  |   |      
|-------------------------------------------- |  | --------------------- | ----- | ---------------- | - | -----
|                                             |  | March 31,2006         |       | December 31,2005
|                                             |  | (Dollars in millions)
|Current borrowings:                          |  |                       |       |                  |   |      
|Current portion of long-term borrowings      |  | $                     | 89    |                  | $ |     
|Current portion of capital lease obligations |  |                       | 1     |                  |   | 1    
|                                             |  |                       |       |                  |   |      
|Total current borrowings                     |  | $                     | 90    |                  | $ | 1    
|                                             |  |                       |       |                  |   |      
|Long-term borrowings:                        |  |                       |       |                  |   |      
|Long-term notes                              |  | $                     | 7,570 |                  | $ | 7,660
|Long-term capital lease obligations          |  |                       | 4     |                  |   | 4    
|                                             |  |                       |       |                  |   |      
|Total long-term borrowings                   |  | $                     | 7,574 |                  | $ | 7,664
|                                             |  |                       |       |                  |   |      



Note 3: Contribution to QCII
Segments



Our operations are integrated into and are part
of the segments of the QCII consolidated group. The chief operating decision maker (CODM) for QCII makes resource allocation decisions and assessments of financial performance for the consolidated group based on wireline services,
wireless services and other services segmentation. Our business contributes to the segments reported by QCII, but the QCII CODM reviews our financial information only in connection with our quarterly and annual reports that we file with the
Securities and Exchange Commission (SEC). Consequently, we do not provide our discrete financial information to the CODM on a regular basis.



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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

FOR THE THREE MONTHS ENDED MARCH 31, 2006

(UNAUDITED)



Set forth below is revenue information for the three months ended March 31, 2006 and 2005 for
revenue derived from external customers for our products and services:



|                           |  |                             |       |      |   |      
|-------------------------- |  | --------------------------- | ----- | ---- | - | -----
|                           |  | Three Months EndedMarch 31,
|                           |  | 2006                        |       | 2005
|                           |  | (Dollars in millions)      
|Voice services             |  | $                           | 1,621 |      | $ | 1,707
|Data and Internet services |  |                             | 615   |      |   | 556  
|Other services             |  |                             | 5     |      |   | 5    
|                           |  |                             |       |      |   |      
|Total operating revenue    |  | $                           | 2,241 |      | $ | 2,268
|                           |  |                             |       |      |   |      



Voice services.
Voice services revenue includes local voice, IntraLATA long-distance voice and access services. Local voice services revenue includes basic local exchange, switching, enhanced voice, operator and collocation services and certain calling features.
Local voice services revenue also includes the provisioning of network transport, billing services and access to our local network on a wholesale basis. IntraLATA long-distance voice services revenue includes IntraLATA long-distance services within
our local service area. Access services revenue includes fees charged to other data and telecommunications providers to connect their customers and their networks to our network.



Data and Internet services. Data and Internet services revenue includes data services (such as traditional private
lines, wholesale private lines, WAN and related equipment), and Internet services (such as high-speed Internet, ISDN and related equipment).



Other services. Other services revenue is predominantly derived from the sublease of our real estate, such as space in our office buildings,
warehouses and other properties.



Affiliate revenue is derived
from telecommunications and other services provided to our affiliated entities. We generally provide the same telecommunications products and services to our affiliated entities as we do in the marketplace. These services include both retail and
wholesale products and services. In addition, we provide billing and collection services, joint marketing, lease of space, and other non-telecommunications services to affiliates.



While revenue from affiliates provided approximately ten percent of our total operating revenue, we do not have any single
customer that provides more than ten percent of our total revenue derived from external customers.



Note 4: Commitments and Contingencies



QCII is involved in several legal proceedings to which we are not a party that, if resolved against QCII, could have a material adverse effect on our business and financial condition. We have included below a
discussion of these matters, together with a discussion of those matters to which we are a party (primarily those discussed below under the Regulatory Matter subheading, as well as one of the Remaining Securities Actions
described below). Only those matters to which we are a party represent contingencies for which we have recorded, or could reasonably anticipate recording, an accrual if appropriate to do so.



Throughout this note, when we refer to a class action as putative
it is because a class has been alleged, but not certified in that matter. Until and unless a class has been certified by the court, it has not been established that the named plaintiffs represent the class of plaintiffs they purport to represent.



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FOR THE THREE MONTHS ENDED MARCH 31, 2006

(UNAUDITED)



Settlement of Consolidated Securities Action



Twelve putative class actions purportedly brought on behalf of purchasers of QCIIs publicly traded securities between
May 24, 1999 and February 14, 2002 have been consolidated into a consolidated securities action pending in federal district court in Colorado. The first of these actions was filed on July 27, 2001. Plaintiffs allege, among other
things, that defendants issued false and misleading financial results and made false statements about QCIIs business and investments, including making materially false statements in certain of QCIIs registration statements. The most
recent complaint in this matter seeks unspecified compensatory damages and other relief. However, counsel for plaintiffs indicated that the putative class would seek damages in the tens of billions of dollars. The SPA action described below has also
been consolidated with the consolidated securities action.



On
November 23, 2005, QCII, certain other defendants, and the putative class representatives entered into and filed with the federal district court in Colorado a Stipulation of Partial Settlement that, if implemented, will settle the consolidated
securities action against QCII and certain other defendants. On January 5, 2006, the federal district court in Colorado issued an order (1) preliminarily approving the proposed settlement, (2) setting a hearing for May 19, 2006
to consider final approval of the proposed settlement, and (3) certifying a class, for settlement purposes only, on behalf of purchasers of QCIIs publicly traded securities between May 24, 1999 and July 28, 2002.



Under the proposed settlement agreement, QCII would pay a total of $400
million in cash$100 million of which was deposited in an escrow account 30 days after preliminary approval of the proposed settlement by the federal district court in Colorado, $100 million of which would be so deposited 30 days after final
approval of the settlement by the court, and $200 million of which would be so deposited on January 15, 2007, plus interest at 3.75% per annum on the $200 million between the date of final approval by the court and the date of payment.



If approved, the proposed settlement agreement in the
consolidated securities action will settle the individual claims of the class representatives and the claims of the class they represent against QCII and all defendants except Joseph Nacchio, QCIIs former chief executive officer, and Robert
Woodruff, QCIIs former chief financial officer. (The non-class action brought by SPA that is consolidated for certain purposes with the consolidated securities action is not part of the settlement.) As part of the proposed settlement, QCII
would receive $10 million from Arthur Andersen LLP, which would also be released by the class representatives and the class they represent, which will offset $10 million of the $400 million that would be payable by QCII. No parties admit any
wrongdoing as part of the proposed settlement.



The proposed
settlement agreement is subject to a number of conditions and future contingencies. Among others, it (i) requires final court approval; (ii) provides QCII with the right to terminate the settlement if class members representing more than a
specified amount of alleged securities losses elect to opt out of the settlement; (iii) provides QCII with the right to terminate the settlement if QCII does not receive adequate protections for claims relating to substantive liabilities of
non-settling defendants; and (iv) is subject to review on appeal even if the district court were finally to approve it. QCII believes that the contingency relating to the distribution of funds paid by QCII in connection with QCIIs
settlement with the Securities and Exchange Commission, or SEC, was satisfied on February 28, 2006, when the federal district court in Colorado entered an order approving the request of the SEC for authority to distribute, in accordance with
the terms of that order, the payments made by QCII and by certain of QCIIs former employees in connection with the settlements entered into between the SEC and QCII and the SEC and those former employees.



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FOR THE THREE MONTHS ENDED MARCH 31, 2006

(UNAUDITED)



A number of parties, including large pension funds, have requested exclusion from the proposed
settlement of the consolidated securities action. As noted below under Remaining Securities ActionsOpt-Outs with Previously-Filed Lawsuits, seven parties that had previously filed individual suits against QCII have requested
exclusion from the proposed settlement, and as noted below under Remaining Securities ActionsOpt-Outs with Recently-Filed Lawsuits, some of the parties that have more recently requested exclusion from the proposed settlement have
also asserted claims against QCII. QCII will vigorously defend against such claims regardless of whether the proposed settlement of the consolidated securities action is consummated.



Settlement of Consolidated ERISA Action



Seven putative class actions purportedly brought on behalf of all participants and beneficiaries of the Qwest Savings and Investment Plan and predecessor
plans, or the Plan, from March 7, 1999 until January 12, 2004 have been consolidated into a consolidated action in federal district court in Colorado. Other defendants in this action include current and former directors of QCII, former
officers and employees of QCII and Deutsche Bank. These suits also purport to seek relief on behalf of the Plan. The first of these actions was filed in March 2002. Plaintiffs assert breach of fiduciary duty claims against QCII and others under
the Employee Retirement Income Security Act of 1974, as amended, alleging, among other things, various improprieties in managing holdings of QCII stock in the Plan. Plaintiffs seek damages, equitable and declaratory relief, along with
attorneys fees and costs and restitution. Counsel for plaintiffs indicated that the putative class would seek billions of dollars of damages.



On April 26, 2006, QCII, the other defendants, and the putative class representatives entered into a Stipulation of Settlement that, if implemented,
will settle the consolidated ERISA action. Under the proposed settlement agreement, QCII would pay a total of $33 million in cash no later than 90 days after preliminary approval of the proposed settlement by the federal district court in Colorado.
Deutsche Bank would pay a total of $4.5 million in cash to settle the claims against it. No parties admit any wrongdoing as part of the proposed settlement. If the proposed settlement is approved by the court, QCII will receive certain insurance
proceeds as a contribution by individual defendants to this settlement, which will offset $10 million of QCIIs $33 million payment. In addition to the $33 million cash settlement, QCII has also agreed to pay, subject to certain contingencies,
the amount (if any) by which the Plans recovery from the settlement of the consolidated securities action is less than $20 million. If approved by the district court, the proposed settlement will settle and release the claims of the class
against QCII and all defendants in the consolidated ERISA action. The proposed settlement, which is subject to preliminary and final approval by the district court, is also subject to review on appeal if the district court were finally to approve
it.



DOJ Investigation and Remaining Securities Actions



The Department of Justice, or DOJ, investigation and the securities actions
described below present material and significant risks to QCII. The size, scope and nature of the restatements of QCIIs consolidated financial statements for 2001 and 2000, which are described in QCIIs previously issued consolidated
financial statements for the year ended December 31, 2002, or QCIIs 2002 Financial Statements, affect the risks presented by this investigation and these actions, as these matters involve, among other things, QCIIs prior accounting
practices and related disclosures. Plaintiffs in certain of the securities actions have alleged QCIIs restatement of items in support of their claims. We can give no assurance as to the impacts on our or QCIIs financial results or
financial condition that may ultimately result from all of these matters.



QCII has a reserve recorded in its financial statements for the minimum estimated amount of loss QCII believes is probable with respect to the remaining securities actions described below as well as any additional



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FOR THE THREE MONTHS ENDED MARCH 31, 2006

(UNAUDITED)



actions that may be brought by parties that, as described below under Additional Opt-Out Parties, have more recently opted out of the proposed
settlement of the consolidated securities action. QCII has recorded its estimate of the minimum liability for these matters because no estimate of probable loss for these matters is a better estimate than any other amount. If the recorded reserve is
insufficient to cover these matters, QCII will need to record additional charges to its consolidated statement of operations in future periods. The amount QCII has reserved for these matters is its estimate of the lowest end of the possible range of
loss. The ultimate outcomes of these matters are still uncertain and the amount of loss QCII may ultimately incur could be substantially more than the reserve it has provided.



QCII continues to defend against the remaining securities actions described below vigorously and is currently unable to
provide any estimate as to the timing of the resolution of these actions. Any settlement of or judgment in one or more of these actions (or any additional actions that may be brought by parties that, as described below under Additional Opt-Out
Parties, have more recently opted out of the proposed settlement of the consolidated securities action) substantially in excess of QCIIs recorded reserves could have a significant impact on QCII, and QCII can give no assurance that it
will have the resources available to pay any such judgment. The magnitude of any settlement or judgment resulting from these actions could materially and adversely affect QCIIs ability to meet its debt obligations and its financial condition,
potentially impacting its credit ratings, its ability to access capital markets and its compliance with debt covenants. In addition, the magnitude of any such settlement or judgment may cause QCII to draw down significantly on its cash balances,
which might force QCII to obtain additional financing or explore other methods to generate cash. Such methods could include issuing additional securities or selling assets. As a wholly owned subsidiary of QCII, our business operations and financial
condition would be similarly affected.



The terms and
conditions of applicable bylaws, certificates or articles of incorporation, agreements or applicable law may obligate QCII to indemnify its current and former directors, officers and employees with respect to certain liabilities, and QCII has been
advancing legal fees and costs to many current and former directors, officers and employees in connection with the DOJ investigation, securities actions and certain other matters.



DOJ Investigation



On July 9, 2002, QCII was informed by the U.S. Attorneys Office for the District of Colorado of a criminal investigation of QCIIs
business. QCII believes the U.S. Attorneys Office has investigated various matters that include transactions related to the various adjustments and restatements described in QCIIs 2002 Financial Statements, transactions between QCII and
certain of its vendors and certain investments in the securities of those vendors by individuals associated with QCII, and certain prior disclosures made by QCII. QCII is continuing in its efforts to cooperate fully with the U.S. Attorneys
Office in its investigation. However, QCII cannot predict the outcome of this investigation or the timing of its resolution.



Remaining Securities Actions



QCII is a defendant in the securities actions described below. Plaintiffs in these actions have requested exclusion from the proposed settlement of the
consolidated securities action. Plaintiffs have variously alleged, among other things, that QCII and the other defendants violated federal and state securities laws, engaged in fraud, civil conspiracy and negligent misrepresentation, and breached
fiduciary duties owed to investors and current and former employees by issuing false and misleading financial reports and statements, falsely inflating



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FOR THE THREE MONTHS ENDED MARCH 31, 2006

(UNAUDITED)



revenue and decreasing expenses, creating false perceptions of revenue and growth prospects and/or employing improper accounting practices. Other defendants
in one or more of these actions include current and former directors of QCII, former officers and employees of QCII, Arthur Andersen LLP, certain investment banks and others. Plaintiffs variously seek, among other things, compensatory and punitive
damages, restitution, equitable and declaratory relief, pre-judgment interest, costs and attorneys fees.



Opt-Outs with Previously-Filed Lawsuits.Together, the parties to these lawsuits contend that they have incurred losses resulting from their
investments in QCIIs securities in excess of $900 million; they have also asserted claims for punitive damages and interest, in addition to claims to recover their alleged losses.



|                                                                  |  |                    |  |                                                             
|----------------------------------------------------------------- |  | ------------------ |  | ------------------------------------------------------------
|Plaintiff(s)                                                      |  | Date Filed         |  | Court                                                       
|State of New Jersey (Treasury Department, Division of Investment) |  | November 27, 2002  |  | New Jersey Superior Court, Mercer County                    
|California State Teachers Retirement System                      |  | December 10, 2002  |  | Superior Court, State of California, County of San Francisco
|State Universities Retirement System of Illinois                  |  | January 10, 2003   |  | Circuit Court of Cook County, Illinois                      
|Stichting Pensioenfonds ABP (SPA)                                 |  | February 9, 2004   |  | Federal District Court in Colorado                          
|A number of New York City pension and retirement funds            |  | September 22, 2004 |  | Federal District Court in Colorado                          
|Shriners Hospital for Children                                    |  | March 22, 2004     |  | Federal District Court in Colorado                          
|Teachers Retirement System of Louisiana                          |  | March 30, 2004     |  | Federal District Court in Colorado                          



Opt-Outs with
Recently-Filed Lawsuits. Together, the parties to these lawsuits contend that they have incurred losses resulting from their investments in QCIIs securities of approximately $371 million; they have also asserted claims for punitive damages
and interest, in addition to claims to recover their alleged losses.



|                                                                        |  |                |  |                                                                      
|----------------------------------------------------------------------- |  | -------------- |  | ---------------------------------------------------------------------
|Plaintiff(s)                                                            |  | Date Filed     |  | Court                                                                
|New York State Common Retirement Fund                                   |  | April 18, 2006 |  | United States District Court for the Southern District of New York   
|San Francisco Employees Retirement System                               |  | April 18, 2006 |  | United States District Court for the Northern District of California 
|Fire and Police Pension Association of Colorado                         |  | April 18, 2006 |  | Federal District Court in Colorado                                   
|Commonwealth of Pennsylvania Public School Employees Retirement System |  | May 1, 2006    |  | United States District Court for the Eastern District of Pennsylvania



Additional Opt-Out
Parties. Since QCII announced the proposed settlement of the consolidated securities action, a number of additional persons, including large pension funds, have requested to be excluded from the class. Some of these additional opt-out parties
have recently filed actions against QCII, which are included in the summary that appears above under Opt-Outs with Recently-Filed Lawsuits. QCII expects that other parties who have opted out will file actions against QCII as well if QCII
is unable to resolve those matters amicably. The claims of those persons who requested to be excluded from the class will not be released as a result of the proposed settlement of the consolidated securities action, even in the event that the
settlement is approved. In the



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FOR THE THREE MONTHS ENDED MARCH 31, 2006

(UNAUDITED)



aggregate, the persons who recently requested exclusion from the class, excluding those listed above under Opt-Outs with Recently-Filed Lawsuits,
contend that they have incurred losses resulting from their investments in QCIIs securities of approximately $1.52 billion, which does not include any claims for punitive damages or interest. Due in part to the recent timing of the decisions
by these persons to request exclusion from the proposed settlement of the consolidated securities action and to the fact that many of the persons who have requested exclusion have not filed lawsuits, it is difficult to evaluate the claims that they
have asserted or may assert. QCII will vigorously defend against any such claims regardless of whether the proposed settlement of the consolidated securities action is consummated.



Other. A putative class action purportedly brought on behalf of purchasers of QCIIs stock between June 28,
2000 and June 27, 2002 and owners of U S WEST, Inc. stock on June 28, 2000 is pending in Colorado in the District Court for the County of Boulder. We are also a defendant in this action. This action was filed on June 27, 2002.
Plaintiffs allege, among other things, that QCII and other defendants issued false and misleading statements and engaged in improper accounting practices in order to accomplish the U S WEST/Qwest merger, to make QCII appear successful and to inflate
the value of QCIIs stock. Plaintiffs seek unspecified monetary damages, disgorgement of illegal gains and other relief.



KPNQwest Litigation/Investigation



A putative class action is pending in the federal district court for the Southern District of New York against QCII, certain of its former executives who
were also on the supervisory board of KPNQwest, N.V. (of which QCII was a major shareholder), and others. This lawsuit was initially filed on October 4, 2002. The current complaint alleges, on behalf of certain purchasers of KPNQwest
securities, that, among other things, defendants engaged in a fraudulent scheme and deceptive course of business in order to inflate KPNQwests revenue and the value of KPNQwest securities. Plaintiffs seek compensatory damages and/or rescission
as appropriate against defendants, as well as an award of plaintiffs attorneys fees and costs. On February 3, 2006, QCII, certain other defendants and the putative class representative in this action executed an agreement to settle
the case against QCII and certain other defendants. Under the settlement agreement, QCII will pay $5.5 million in cash to the settlement fund no later than 30 days following preliminary court approval, and no later than 30 days following final
approval by the court, QCII will issue shares of its stock to the settlement fund then valued at $5.5 million as additional consideration for the settlement. The settlement agreement would settle the individual claims of the putative class
representative and the claims of the class he purports to represent against QCII and all defendants except Koninklijke KPN N.V. a/k/a Royal KPN N.V., Willem Ackermans, Eelco Blok, Joop Drechsel, Martin Pieters, and Rhett Williams. The settlement
agreement is subject to a number of conditions and future contingencies. Among others, it (i) requires both preliminary and final court approval; (ii) provides QCII with the right to terminate the settlement if class members representing
more than a specified amount of alleged securities losses elect to opt out of the settlement; (iii) provides QCII with the right to terminate the settlement if it does not receive adequate protections for claims relating to substantive
liabilities of non-settling defendants; and (iv) is subject to review on appeal even if the district court were finally to approve it. Any lawsuits that may be brought by parties opting out of the settlement will be vigorously defended
regardless of whether the settlement described herein is consummated. No parties admit wrongdoing as a part of the settlement agreement.



On October 31, 2002, Richard and Marcia Grand, co-trustees of the R.M. Grand Revocable Living Trust, dated January 25, 1991, filed a lawsuit in
Arizona Superior Court which, as amended, alleges, among other things, that the defendants violated state and federal securities laws and breached their fiduciary duty in connection with investments by plaintiffs in securities of KPNQwest. QCII is a
defendant in this lawsuit along with Qwest B.V. (one



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FOR THE THREE MONTHS ENDED MARCH 31, 2006

(UNAUDITED)



of QCIIs subsidiaries), Joseph Nacchio and John McMaster, the former President and Chief Executive Officer of KPNQwest. Plaintiffs claim to have lost
approximately $10 million in their investments in KPNQwest. The superior court granted defendants motion for partial summary judgment with respect to a substantial portion of plaintiffs claims. Plaintiffs have appealed that order to
the Arizona Court of Appeals.



On June 25, 2004, J.C. van
Apeldoorn and E.T. Meijer, in their capacities as trustees in the Dutch bankruptcy proceeding for KPNQwest, filed a complaint in the federal district court for the District of New Jersey alleging violations of the Racketeer Influenced and Corrupt
Organizations Act, and breach of fiduciary duty and mismanagement under Dutch law. QCII is a defendant in this lawsuit along with Joseph Nacchio, Robert S. Woodruff and John McMaster. Plaintiffs allege, among other things, that defendants
actions were a cause of the bankruptcy of KPNQwest and they seek damages for the bankruptcy deficit of KPNQwest of approximately $2.4 billion. Plaintiffs also seek treble damages as well as an award of plaintiffs attorneys fees and
costs.



On June 17, 2005, Appaloosa Investment Limited
Partnership I, Palomino Fund Ltd., and Appaloosa Management L.P. filed a complaint in the federal district court for the Southern District of New York against QCII, Joseph Nacchio, John McMaster and Koninklijke KPN N.V., or KPN. The complaint
alleges that defendants violated federal securities laws in connection with the purchase by plaintiffs of certain KPNQwest debt securities. Plaintiffs seek compensatory damages, as well as an award of plaintiffs attorneys fees and costs.



Various former lenders to KPNQwest or their assignees,
including Citibank, N.A., Deutsche Bank AG London and others, have notified QCII of their intent to file legal claims in connection with the origination of a credit facility and subsequent borrowings made by KPNQwest of approximately
300 million under that facility. They have indicated that QCII would be a defendant in this threatened lawsuit along with Joseph Nacchio, John McMaster, Drake Tempest, QCIIs former General Counsel, KPN and other former employees of
QCII, KPN or KPNQwest.



On August 23, 2005, the Dutch
Shareholders Association (Vereniging van Effectenbezitters, or VEB) filed a petition for inquiry with the Enterprise Chamber of the Amsterdam Court of Appeals, located in the Netherlands, with regard to KPNQwest. VEB seeks an inquiry into the
policies and course of business at KPNQwest that are alleged to have caused the bankruptcy of KPNQwest in May 2002, and an investigation into alleged mismanagement of KPNQwest by its executive management, supervisory board members, joint
venture entities (QCII and KPN), and KPNQwests outside auditors and accountants.



Other than the putative class action in which QCII has entered into a proposed settlement (and for which it has recorded a reserve of $11 million in connection with the proposed settlement), QCII will continue to
defend against the pending KPNQwest litigation matters vigorously and will likewise defend against any claims asserted by KPNQwests former lenders if litigation is filed.



Regulatory Matter



On July 15, 2004, the New Mexico state regulatory commission opened a proceeding to investigate whether we are in compliance with or are likely to
meet a commitment that we made in 2001 to invest in communications infrastructure in New Mexico through March 2006 pursuant to an Alternative Form of Regulation plan, or AFOR. The AFOR says, in part, that Qwest commits to devote a substantial
budget to infrastructure investment, with the goal of achieving the purposes of this Plan. Specifically, Qwest will make capital expenditures of not



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FOR THE THREE MONTHS ENDED MARCH 31, 2006

(UNAUDITED)



less than $788 million over the term of this Plan. This level of investment is necessary to meet the commitments made in this Plan to increase
Qwests investment and improve its service quality in New Mexico. Multiple parties filed comments in that proceeding and variously argued that we should be subject to a range of requirements including an escrow account for capital
spending, new investment obligations, and customer credits or price reductions.



On April 14, 2005, the Commission issued its Final Order in connection with this investigation. In this Final Order, the Commission ruled that the evidence in the record indicates we will not be in compliance
with the investment commitment at the conclusion of the AFOR in March 2006, and if the current trend in our capital expenditures continues, there will be a shortfall of $200 million or more by the end of the AFOR. The Commission also concluded
that we have an unconditional commitment to invest $788 million over the life of the AFOR. Finally, the Commission ruled that if we fail to satisfy this investment commitment, any shortfall must be credited or refunded to our New Mexico
customers. The Commission also opened an enforcement and implementation docket to review our investments and consider the structure and size of any refunds or credits to be issued to customers. On May 12 and 13, 2005, we filed appeals in
federal district court and in the New Mexico State Supreme Court, respectively, challenging the lawfulness of the Commissions Final Order. On February 24, 2006, the federal district court granted the defendants motion to dismiss, ruling
that, under the Johnson Act, the Final Order was an order affecting rates that should be reviewed by the state court, not the federal court. Qwest has filed a motion for reconsideration.



We have vigorously argued, among other things, that the underlying purposes of the investment commitment set forth in the
AFOR have been met in that we have met all service quality and service deployment obligations under the AFOR; that, in light of this, we should not be held to a specific amount of investment; and that the Commission has failed to include all
eligible investments in the calculation of how much we have actually invested. Nevertheless, we believe it is unlikely the Commission will reverse its determination that we have an unconditional obligation to invest $788 million. In addition,
we have argued, and will continue to argue, that customer credits or refunds are an impermissible and illegal form of relief for the Commission to order in the event there is an investment shortfall. On January 30, 2006, Qwest filed with the
New Mexico Commission an Offer of Settlement and to Revise AFOR. This Offer proposes to extend the time period for Qwest to complete $788 million in investments to three years following the approval of the Offer. Under the Offer, Qwest has included
within the $788 million of total investments a proposal to invest $85 million in projects approved by the Commission. In an order dated February 7, 2006, the Commission rejected the Offer on technical grounds, ruling that it was improper as to
form. In this order, the Commission also encouraged Qwest and the other parties to continue settlement negotiations, and we have done so.



We believe there is a substantial likelihood that the ultimate outcome of this matter will result in us having to make expenditures or payments beyond
those we would otherwise make in the normal course of business. These expenditures or payments could take the form of one or more of the following: penalties, capital investment, basic service rate reductions and customer refunds or credits. At this
time, however, we are not able to reasonably estimate the amount of these expenditures or payments and, accordingly, have not reserved any amount for such potential liability. Any final resolution of this matter could be material.



Other Matters



Several putative class actions relating to the installation of fiber optic cable in certain rights-of-way were filed against
QCII on behalf of landowners on various dates and in various courts in California, Colorado,



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FOR THE THREE MONTHS ENDED MARCH 31, 2006

(UNAUDITED)



Georgia, Illinois, Indiana, Kansas, Mississippi, Missouri, Oregon, South Carolina, Tennessee and Texas. For the most part, the complaints challenge
QCIIs right to install its fiber optic cable in railroad rights-of-way. Complaints in Colorado, Illinois and Texas, also challenge QCIIs right to install fiber optic cable in utility and pipeline rights-of-way. The complaints allege that
the railroads, utilities and pipeline companies own the right-of-way as an easement that did not include the right to permit QCII to install its fiber optic cable in the right-of-way without the plaintiffs consent. Most actions (California,
Colorado, Georgia, Kansas, Mississippi, Missouri, Oregon, South Carolina, Tennessee and Texas) purport to be brought on behalf of state-wide classes in the named plaintiffs respective states. Several actions purport to be brought on behalf of
multi-state classes. The Illinois state court action purports to be on behalf of landowners in Illinois, Iowa, Kentucky, Michigan, Minnesota, Nebraska, Ohio and Wisconsin. The Illinois federal court action purports to be on behalf of landowners in
Arkansas, California, Florida, Illinois, Indiana, Missouri, Nevada, New Mexico, Montana and Oregon. The Indiana action purports to be on behalf of a national class of landowners adjacent to railroad rights-of-way over which QCIIs network
passes. The complaints seek damages on theories of trespass and unjust enrichment, as well as punitive damages.



The Internal Revenue Service (IRS) proposed a tax adjustment for tax years 1994 through 1996. The principal issue involves the allocation of
costs between long-term contracts with customers for the installation of conduit or fiber optic cable and additional conduit or fiber optic cable retained by QCII. The IRS disputes the allocation of the costs between QCII and third parties. Similar
claims have been asserted against QCII with respect to the 1997 to 1998 and the 1998 to 2001 audit periods. On March 13, 2006, the Tax Court issued a decision, which was favorable to QCII. The IRS sought rehearing and indicated that, if
rehearing is denied, it will appeal the decision to the Tenth Circuit Court of Appeals. The trial for the 1997-1998 tax years has been tentatively scheduled for April or May 2007. If QCII ultimately were to lose this issue for the tax years 1994
through 1998, QCII estimates it would have to pay approximately $57 million in tax plus approximately $45 million in interest pursuant to tax sharing agreements with the Anschutz Company relating to those time periods.



QCII has tax related matters pending against it, certain of which are before
the Appeals Office of the IRS. In addition, tax sharing agreements have been executed between QCII and previous affiliates, and QCII believes the liabilities, if any, arising from adjustments to previously filed returns would be borne by the
affiliated group member determined to have a deficiency under the terms and conditions of such agreements and applicable tax law. QCII has recognized in its financial statements certain amounts owed to it under one of these agreements; however,
generally, QCII has not provided for liabilities of former affiliated members or for claims they have asserted or may assert against QCII. QCII believes it has adequately provided for these tax-related matters. If the recorded reserves for these
tax-related matters are insufficient, QCII may need to record additional amounts in future periods.



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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



Unless the context requires otherwise, references in this report to QC refer to Qwest Corporation, references to Qwest,
we, us, the Company and our refer to Qwest Corporation and its consolidated subsidiaries, and references to QCII refer to our ultimate parent company, Qwest Communications
International Inc., and its consolidated subsidiaries.



Certain statements set forth below under this caption constitute forward looking statements. See Special Note Regarding Forward Looking Statements at the end of this Item 2 for additional factors relating to such
statements, and see Risk Factors in Item 1A of Part II of this report for a discussion of certain risk factors applicable to our business, financial condition and results of operations.



Business Overview and Presentation



We provide local telecommunications and related services, IntraLATA
long-distance services and data services within our local service area, which consists of the 14-state region of Arizona, Colorado, Idaho, Iowa, Minnesota, Montana, Nebraska, New Mexico, North Dakota, Oregon, South Dakota, Utah, Washington and
Wyoming. Our operations are included in the consolidated operations of our ultimate parent, QCII, and generally account for the majority of QCIIs consolidated revenue. Our telecommunications products and services are provided through our
telephone network located within our local service area. In addition to our operations, QCII maintains a wireless business and a national fiber optic network. Through its fiber optic network, QCII provides the following wireline products and
services that we do not provide:



| |  |  | InterLATA long-distance services;
| | - |  | ---------------------------------



| |  |  | Dedicated Internet access;
| | - |  | --------------------------



| |  |  | Virtual private network;
| | - |  | ------------------------



| |  |  | Web hosting; and
| | - |  | ----------------



| |  |  | Data Integration.
| | - |  | -----------------



For certain other products and services we provide, and for a variety of internal communications functions, we utilize QCIIs fiber optic network to
transport voice and data traffic. Also, through its fiber optic network, QCII provides nationally some data and Internet access services, including private line, ATM and Frame Relay, which are similar to what we provide within our local service
area.



Our analysis presented below is organized to provide the
information we believe will be instructive for understanding the relevant trends going forward. However, this discussion should be read in conjunction with our condensed consolidated financial statements in Item 1 of Part I of this report,
including the notes thereto.



Our operations are integrated
into and are part of the segments of the QCII consolidated group. The chief operating decision maker, or CODM, for us is the same as that for the consolidated group. The CODM makes resource allocation decisions and assessments of financial
performance for the consolidated group based on wireline services, wireless services and other segmentation. For more information about QCIIs reporting segments, see QCIIs Annual Report on Form 10-K for the year ended
December 31, 2005. Our business contributes to the segments reported by QCII, but the QCII CODM reviews our financial information only in connection with our quarterly and annual reports that we file with the Securities and Exchange Commission,
or SEC. See further discussion in Note 3Contribution to QCII Segments to our condensed consolidated financial statements in Item 1 of Part I of this report. Certain prior year revenue, expense and access line amounts have been
reclassified to conform to the current year presentations.



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Business Trends



Our financial results continue to be impacted by several significant trends, which are described below:



| |  |  | Access line losses. Our revenue has been, and we expect it to continue to be, adversely affected by access line losses. Increased competition, including product substitution,
continues to be the primary reason for our access line losses. For example, consumers are increasingly substituting cable and wireless telecommunications services for traditional telecommunications services, which has increased the number and type
of competitors within our industry and decreased our market share. Product bundling, as described more fully below, has been one of our responses to our declining revenue due to access line losses.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Data and Internet growth.Data and Internet revenues and subscribers continue to grow as customers continue to migrate Internet service to higher speed connections. We
continue to expand our availability as well as increase the available speeds in order to meet customer demand. We expect that this trend will continue into the future. We also expect to face continuing competition for these subscribers.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Product bundling. We believe consumers increasingly value the convenience of receiving multiple services from a single provider. As such, we increased our marketing and
advertising spending levels in 2005 and 2006 focusing on product bundling and packaging. Product bundles and packages represent combinations of products and services, such as local voice, long-distance, high-speed Internet, video and wireless, and
features and services, such as three-way calling and call forwarding related to an access line. To do so, we rely on joint marketing relationships with our affiliates, which relationships allow us to bundle our services with wireless, long distance,
private line and other services. As a result of these offerings, we have seen increased sales.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Operational efficiencies. We have continued to evaluate our operating structure and focus, and we continue to right-size our workforce in response to changes in the
telecommunications industry. Through targeted restructuring plans in prior years, focused improvements in operational efficiency, process improvements through automation and normal employee attrition, we have reduced our workforce and
employee-related costs while achieving operational goals.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



While these trends are important to understanding and evaluating our financial results, the other transactions, events and trends discussed in Risk Factors in Item 1A of Part II of this report may also materially impact our
business operations and financial results.



Results of Operations



Overview



We generate revenue from the provision of voice services, data and Internet
services and other services, as well as revenue from the provision of services to our affiliates.



| |  |  | Voice services. Voice services revenue includes local voice, IntraLATA long-distance voice and access services. Local voice services revenue includes basic local exchange,
switching, enhanced voice, operator and collocation services and certain calling features. Local voice services revenue also includes the provisioning of network transport, billing services and access to our local network on a wholesale basis.
IntraLATA long-distance voice services revenue includes IntraLATA long-distance services within our local service area. Access services revenue includes fees charged to other data and telecommunications providers to connect their customers and their
networks to our network.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Data and Internet services. Data and Internet services revenue includes data services (such as traditional private lines, wholesale private lines, WAN and related equipment)
and Internet services (such as high-speed Internet, ISDN and related equipment).
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Other services.Other services revenue is predominantly derived from the sublease of some of our real estate, such as space in our office buildings, warehouses and other
properties.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | Affiliate services. Affiliate services revenue is derived from telecommunications and other services provided to our affiliated entities. In addition to voice services, data
and Internet services and other services, we provide sales and marketing of affiliates products and services by our sales channels, and other miscellaneous services, including billing and collection services, to our affiliates.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Depending on the products or services purchased,
a customer may pay an up-front or monthly fee, a usage charge or a combination of these.



The following table summarizes our results of operations for the three months ended March 31, 2006 and 2005:



|                           |      |                             |       |      |                      |   |       |          |  |   |     |   |  |    |   
|-------------------------- | ---- | --------------------------- | ----- | ---- | -------------------- | - | ----- | -------- |  | - | --- | - |  | -- | --
|                           |      | Three MonthsEnded March 31, |       |      | Increase/ (Decrease) |   |       | % Change | 
|                           | 2006 |                             |       | 2005 |                      |   |      
|                           |      | (Dollars in millions)       |       |      |                      |  
|Operating revenue          |      | $                           | 2,478 |      |                      | $ | 2,551 |          |  | $ | (73 | ) |  | (3 | )%
|Operating expenses         |      |                             | 1,875 |      |                      |   | 1,966 |          |  |   | (91 | ) |  | (5 | )%
|Other expensenet          |      |                             | 152   |      |                      |   | 162   |          |  |   | (10 | ) |  | (6 | )%
|                           |      |                             |       |      |                      |   |       |          |  |   |     |   |  |    |   
|Income before income taxes |      |                             | 451   |      |                      |   | 423   |          |  |   | 28  |   |  | 7  | % 
|Income tax expense         |      |                             | (167  | )    |                      |   | (161  | )        |  |   | (6  | ) |  | (4 | )%
|                           |      |                             |       |      |                      |   |       |          |  |   |     |   |  |    |   
|Net income                 |      | $                           | 284   |      |                      | $ | 262   |          |  | $ | 22  |   |  | 8  | % 
|                           |      |                             |       |      |                      |   |       |          |  |   |     |   |  |    |   



Operating Revenue



The following table compares operating revenue for the three months ended
March 31, 2006 and 2005:



|                           |      |                             |       |                      |   |       |                   |   |     |   |  |     |   
|-------------------------- | ---- | --------------------------- | ----- | -------------------- | - | ----- | ----------------- | - | --- | - |  | --- | --
|                           |      | Three MonthsEnded March 31, |       | Increase/ (Decrease) |   |       | Percentage Change |  
|                           | 2006 |                             | 2005  |                      |  
|                           |      | (Dollars in millions)       |       |                      |   |      
|Voice services             |      | $                           | 1,621 |                      | $ | 1,707 |                   | $ | (86 | ) |  | (5  | )%
|Data and Internet services |      |                             | 615   |                      |   | 556   |                   |   | 59  |   |  | 11  | % 
|Affiliate services         |      |                             | 237   |                      |   | 283   |                   |   | (46 | ) |  | (16 | )%
|Other services             |      |                             | 5     |                      |   | 5     |                   |   |    |   |  | 0   | % 
|                           |      |                             |       |                      |   |       |                   |   |     |   |  |     |   
|Total operating revenue    |      | $                           | 2,478 |                      | $ | 2,551 |                   | $ | (73 | ) |  | (3  | )%
|                           |      |                             |       |                      |   |       |                   |   |     |   |  |     |   



Voice Services



The decrease in voice services revenue was primarily
due to a decrease in mass markets and business access line losses from competitive pressures, including wireless and cable substitution. Access services revenue also declined primarily due to lower volumes. In addition, we are seeing a decline in
local services revenue related to our bundle discounts, as more customers take advantage of the bundle. We continue to see declines in wholesale access lines, as demand for UNEs decreases.



The following table shows our access lines by channel as of March 31,
2006 and 2005:



|             |  |                |  |                      |  |      |                   |  |     |   
|------------ |  | -------------- |  | -------------------- |  | ---- | ----------------- |  | --- | --
|             |  | Access Lines   | 
|             |  | March 31,      |  | Increase/ (Decrease) |  |      | Percentage Change | 
|             |  | 2006           |  | 2005                 |  |     
|             |  | (in thousands) |  |                      |  |     
|Mass markets |  | 9,933          |  | 10,405               |  | (472 | )                 |  | (5  | )%
|Business     |  | 2,946          |  | 3,086                |  | (140 | )                 |  | (5  | )%
|Wholesale    |  | 1,667          |  | 1,848                |  | (181 | )                 |  | (10 | )%
|             |  |                |  |                      |  |      |                   |  |     |   
|Total        |  | 14,546         |  | 15,339               |  | (793 | )                 |  | (5  | )%
|             |  |                |  |                      |  |      |                   |  |     |   



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Data and Internet Services



The increase in data and Internet services revenue was due to the transfer of a new Internet service to us from an
affiliate. Revenue also increased due to high-speed Internet subscriber growth in our mass markets channel as a result of migration from dial-up connections and expanded service availability, partially offset by the termination of our wholesale
modem services product in April 2005.



Affiliate Services



The decrease in affiliate services revenue was
primarily caused by a price reduction for billing and collection services and a loss of services provided to affiliates, primarily from our affiliates transition to a third-party wireless provider. The decreases were partially offset by
increased switched access, Private Line and other services primarily in support of our affiliates long distance and data businesses.



Operating Expenses



The following table provides further detail regarding our operating expenses for the three months ended March 31, 2006 and 2005:



|                                                              |  |                             |       |                      |   |       |                   |   |     |   |  |     |   
|------------------------------------------------------------- |  | --------------------------- | ----- | -------------------- | - | ----- | ----------------- | - | --- | - |  | --- | --
|                                                              |  | Three Months EndedMarch 31, |       | Increase/ (Decrease) |   |       | Percentage Change |  
|                                                              |  | 2006                        |       | 2005                 |   |      
|                                                              |  | (Dollars in millions)       |       |                      |   |      
|Operating expenses:                                           |  |                             |       |                      |   |       |                   |   |     |   |  |     |   
|Cost of sales                                                 |  |                             |       |                      |   |       |                   |   |     |   |  |     |   
|Employee-related costs                                        |  | $                           | 346   |                      | $ | 361   |                   | $ | (15 | ) |  | (4  | )%
|Network expenses                                              |  |                             | 41    |                      |   | 47    |                   |   | (6  | ) |  | (13 | )%
|Other non-employee related costs                              |  |                             | 131   |                      |   | 125   |                   |   | 6   |   |  | 5   | % 
|Affiliate costs                                               |  |                             | 60    |                      |   | 53    |                   |   | 7   |   |  | 13  | % 
|                                                              |  |                             |       |                      |   |       |                   |   |     |   |  |     |   
|Total cost of sales                                           |  |                             | 578   |                      |   | 586   |                   |   | (8  | ) |  | (1  | )%
|Selling, general and administrative                           |  |                             |       |                      |   |       |                   |   |     |   |  |     |   
|Employee-related costs                                        |  |                             | 139   |                      |   | 160   |                   |   | (21 | ) |  | (13 | )%
|Bad debt                                                      |  |                             | 20    |                      |   | 23    |                   |   | (3  | ) |  | (13 | )%
|Restructuring, realignment and severance related costs        |  |                             | 4     |                      |   | 5     |                   |   | (1  | ) |  | (20 | )%
|Property and other taxes                                      |  |                             | 78    |                      |   | 87    |                   |   | (9  | ) |  | (10 | )%
|Other non-employee-related costs                              |  |                             | 188   |                      |   | 156   |                   |   | 32  |   |  | 21  | % 
|Affiliate costs                                               |  |                             | 272   |                      |   | 279   |                   |   | (7  | ) |  | (3  | )%
|                                                              |  |                             |       |                      |   |       |                   |   |     |   |  |     |   
|Total selling, general and administrative                     |  |                             | 701   |                      |   | 710   |                   |   | (9  | ) |  | (1  | )%
|Depreciation                                                  |  |                             | 525   |                      |   | 579   |                   |   | (54 | ) |  | (9  | )%
|Capitalized software and other intangible assets amortization |  |                             | 71    |                      |   | 91    |                   |   | (20 | ) |  | (22 | )%
|                                                              |  |                             |       |                      |   |       |                   |   |     |   |  |     |   
|Total operating expenses                                      |  | $                           | 1,875 |                      | $ | 1,966 |                   | $ | (91 | ) |  | (5  | )%
|                                                              |  |                             |       |                      |   |       |                   |   |     |   |  |     |   



Cost of Sales



Cost of sales includes employee-related costs (such as
salaries, wages and benefits directly attributable to products or services), network expenses and other non-employee related costs (such as real estate, USF charges, call termination fees, materials and supplies, contracted engineering services and
computer system support), which are incurred by us or on our behalf by our affiliates. Cost of sales remained flat at 23% of revenue for the three months ended March 31, 2006 and 2005.



Employee-related costs decreased primarily due to a reduction in employee
benefit expense. Network expenses decreased primarily as a result of right of way, pole rental, and wholesale modem services expense reductions. These decreases were partially offset by increases in non-employee costs related to real estate.



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The increase in affiliate costs was primarily due to the purchase of a new Internet service from an
affiliate, partially offset by overall cost reductions due to employee reductions at our affiliates and reduced contract labor and purchases by our affiliates.



Selling, General and Administrative



Selling, general and administrative, or SG&A, expenses include employee-related costs such as salaries, wages and benefits not directly attributable
to products or services, severance related costs, sales commissions, bad debt charges and other non-employee related costs such as property taxes, real estate, marketing and advertising, professional service fees and computer systems support
incurred by us or on our behalf by our affiliates. For the three months ended March 31, 2006 as compared to the three months ended March 31, 2005, SG&A expenses decreased by $9 million, and as a percentage of revenue remained flat at
28%.



Employee-related cost decreased due to decreased salaries
and wages as a result of reduced headcount, reduced commissions and lower benefit expense. Property and other taxes decreased primarily due to a net taxable property tax base decrease. Other non-employee related costs, such as real estate,
professional fees and marketing and advertising, increased primarily due to an increase in third-party contract work and marketing and advertising.



Affiliate costs include services for corporate administration, information technology, sales, marketing and advertising and technical support. Affiliate
costs decreased primarily as a result of employee reductions at our affiliates and reduced contract labor and purchases by our affiliates. These decreases were offset in part by increases in marketing and advertising and telecommunications expenses
and changes in cost allocations.



Combined Pension and
Post-Retirement Benefits



Our employees participate in the
QCII pension, non-qualified pension and post-retirement healthcare and life insurance benefit plans. The amounts contributed by us are not segregated or restricted to pay amounts due to our employees and may be used to provide benefits to other
employees of QCII or its affiliates. QCII allocates the cost of pension, non-qualified pension, and post-retirement healthcare and life insurance benefits and the associated obligations and assets to us and determines our required contribution. The
allocation is based upon demographics of our employees compared to all the remaining participants.



Our results include expenses of $40 million for the three months ended March 31, 2006 and $55 million for the three months ended March 31, 2005.
The expense is a function of the amount of pension, non-qualified pension and post-retirement benefits earned, interest on projected benefit obligations, amortization of costs and credits from prior benefit changes and the expected return on the
assets held in the various plans. The expense is allocated to cost of sales and SG&A.



Depreciation and Amortization



Depreciation expense for the three months ended March 31, 2006 was $525 million or 9% lower than the same period in the prior year. The primary driver of this decrease was the decreased level of our capital expenditures over a period
of time and the changing mix of our investment in property, plant and equipment over that period of time. Absent a significant increase in our capital investment program or a decrease in the estimate of the useful lives of assets, we expect that our
year over year depreciation expense will continue to decrease.



Amortization expense for the three months ended March 31, 2006 was $71 million or 22% lower than the same period in the prior year. This reduction reflects the lower capital spending on software related assets since 2001.



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Other ExpenseNet



Other expensenet generally includes interest expense, net of capitalized interest, and other incomenet, which
includes interest income.



|                           |  |                             |     |                      |      |   |                   |  |   |     |   |  |      |   
|-------------------------- |  | --------------------------- | --- | -------------------- | ---- | - | ----------------- |  | - | --- | - |  | ---- | --
|                           |  | Three Months endedMarch 31, |     | Increase/ (Decrease) |      |   | Percentage Change | 
|                           |  | 2006                        |     |                      | 2005 |   |                  
|                           |  | (Dollars in millions)       |     |                      |      |  
|Interest expensenet       |  | $                           | 153 |                      |      | $ | 149               |  | $ | 4   |   |  | 3    | % 
|Other (income) expensenet |  |                             | (1  | )                    |      |   | 13                |  |   | (14 | ) |  | (108 | )%
|                           |  |                             |     |                      |      |   |                   |  |   |     |   |  |      |   
|Total other expensenet    |  | $                           | 152 |                      |      | $ | 162               |  | $ | (10 | ) |  | (6   | )%
|                           |  |                             |     |                      |      |   |                   |  |   |     |   |  |      |   



Other (income)
expensenet. The increase in other income is primarily due to a $16 million charge recorded associated with the fair value of interest rate swap agreements in the three months ended March 31, 2005.



Income Taxes



The effective income tax rate is the provision for income taxes as a
percentage of income before income tax. The effective income tax rate for the three months ended March 31, 2006 decreased to 37% as compared to 38.1% for the three months ended March 31, 2005. The decrease was primarily due to an increase
in the non-taxable income associated with the federal subsidy under the Medicare Prescription Drug, Improvement and Modernization Act of 2003 and lower state taxes, partially offset by an increase in expense associated with our uncertain tax
positions.



Liquidity and Capital Resources



We are a wholly owned subsidiary of Qwest Services Corporation, or QSC,
which is wholly owned by QCII. As such, factors relating to or affecting QCIIs liquidity and capital resources could have material impacts on us, including changes in the markets perception of us and impacts on our credit ratings and on
our access to capital markets. QCII and its consolidated subsidiaries had total borrowings of $15.4 billion at March 31, 2006 and $15.5 billion at December 31, 2005.



QCII has cash management arrangements between certain of its subsidiaries that include lines of credit, inter-company
obligations, capital contributions and dividends. As part of these cash management arrangements, affiliates provide lines of credit to certain other affiliates. Amounts outstanding under these lines of credit and inter-company obligations vary from
time to time and are classified as short-term borrowings.



Near-Term View



We had $218 million in cash and cash equivalents and $41
million of short-term investments available at March 31, 2006. For the three months ended March 31, 2006, our primary source of funds was cash provided by operating activities. During 2006, we expect to use our available excess cash
primarily to pay dividends to our parent and make additional investment in our network. For the three months ended March 31, 2006, we declared dividends of $1 billion to our parent.



As of March 31, 2006, our working capital deficit had increased $596 million since December 31, 2005, primarily as
a result of dividends declared of $1 billion and capital expenditures of $292 million, partially offset by earnings before depreciation and amortization.



Our working capital deficit is primarily caused by dividends that we pay to QSC. The timing of cash payments for declared dividends to QSC is at our
discretion in consultation with QSC. We continue to produce



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significant cash from operating activities, and we believe that our cash on hand together with our cash flows from operations should be sufficient to meet
our cash needs through the next twelve months. However, if we or QCII become subject to significant judgments, settlements and/or tax payments, as further discussed in Note 4Commitments and Contingencies to our condensed consolidated financial
statements in Item 1 of Part I of this report, we or QCII could be required to make significant payments that we or QCII may not have the resources to make. The magnitude of any settlements or judgments resulting from these actions could
materially and adversely affect QCIIs ability to meet its debt obligations and its financial condition, potentially impacting its credit ratings, its ability to access capital markets and its compliance with debt covenants. In addition, the
magnitude of any settlements or judgments may cause QCII to draw down significantly on its cash balances, which might force it to obtain additional financing or explore other methods to generate cash. Such methods could include issuing additional
securities or selling assets. As a wholly owned subsidiary of QCII, our business operations and financial condition would be similarly affected.



To the extent that QCIIs EBITDA (as defined in QCIIs debt covenants) is reduced by cash judgments, settlements and/or tax payments, its debt
to consolidated EBITDA ratios under certain debt agreements will be adversely affected. This could reduce QCIIs liquidity and flexibility due to potential restrictions on drawing on its line of credit and potential restrictions on incurring
additional debt under certain provisions of its debt agreements. As a wholly owned subsidiary of QCII, our business operations and financial condition could be similarly affected, potentially impacting our credit ratings and access to capital
markets.



In addition, QSC has a currently undrawn, five-year
$850 million revolving credit facility (referred to as the 2005 QSC Credit Facility) that contains various limitations, including a restriction on using any proceeds from the facility to pay settlements or judgments relating to the investigation and
securities actions discussed in Note 4Commitments and Contingencies to our condensed consolidated financial statements in Item 1 of Part I of this report.



We expect that our 2006 capital expenditures will be slightly higher than our 2005 levels.



Long-Term View



We have historically operated with a working capital deficit due to our practice of declaring and paying regular cash
dividends and it is likely that we will operate with a working capital deficit in the future. As discussed below, we continue to generate substantial cash from operations. We believe that cash provided by operations, combined with our current cash
position and continued access to capital markets to refinance our current portion of debt, should allow us to meet our cash requirements for the foreseeable future.



We may periodically need to obtain financing in order to meet our debt obligations as they come due. We may also need to
obtain additional financing or investigate other methods to generate cash (such as further cost reductions or the sale of assets) if revenue and cash provided by operations decline, if economic conditions weaken, if competitive pressures increase or
if we or QCII become subject to significant judgments, settlements and/or tax payments as further discussed in Note 4Commitments and Contingencies to our condensed consolidated financial statements in Item 1 of Part I of this report. In
the event of an adverse outcome in one or more of these matters, we or QCII could be required to make significant payments that we do not have the resources to make. The magnitude of any settlements or judgments resulting from these actions could
materially and adversely affect QCIIs ability to meet its debt obligations and its financial condition, potentially impacting its credit ratings, its ability to access capital markets and its compliance with debt covenants. In addition, the
magnitude of any settlements or judgments may cause QCII to draw down significantly on its cash balances, which might force it to obtain additional financing or explore other methods to generate cash. Such methods could include issuing additional
securities or selling assets. As a wholly owned subsidiary of QCII, our business operations and financial condition could be similarly affected, potentially impacting our credit ratings and access to the capital markets.



The 2005 QSC Credit Facility makes available to QSC $850 million of
additional credit subject to certain restrictions as described below, and is currently undrawn. This facility has a cross payment default provision, and



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this facility and certain other debt issues of QCII and its other subsidiaries also have cross acceleration provisions. When present, such provisions could
have a wider impact on liquidity than might otherwise arise from a default or acceleration of a single debt instrument. These provisions generally provide that a cross default under these debt instruments could occur if:



| |  |  | QCII fails to pay any indebtedness when due in an aggregate principal amount greater than $100 million;
| | - |  | -------------------------------------------------------------------------------------------------------



| |  |  | any indebtedness is accelerated in an aggregate principal amount greater than $100 million ($25 million in the case of one of the debt instruments); or
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | judicial proceedings are commenced to foreclose on any of QCIIs assets that secure indebtedness in an aggregate principal amount greater than $100 million.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------



Upon such a cross default, the creditors of a
material amount of QCIIs debt may elect to declare that a default has occurred under their debt instruments and to accelerate the principal amounts due such creditors. Cross acceleration provisions are similar to cross default provisions, but
permit a default in a second debt instrument to be declared only if in addition to a default occurring under the first debt instrument, the indebtedness due under the first debt instrument is actually accelerated. As a wholly owned subsidiary of
QCII, in the event of such a cross-default or cross-acceleration, our business operations and financial condition could be affected, potentially impacting our credit ratings and access to the capital markets. In addition, the 2005 QSC Credit
Facility contains various limitations, including a restriction on using any proceeds from the facility to pay settlements or judgments relating to the investigation and securities actions discussed in Note 4Commitments and Contingencies to our
condensed consolidated financial statements in Item 1 of Part I of this report.



Historical View



|                                      |  |                              |      |   |                     |   |       |         |  |   |      |   |  |     |   
|------------------------------------- |  | ---------------------------- | ---- | - | ------------------- | - | ----- | ------- |  | - | ---- | - |  | --- | --
|                                      |  | Three Months Ended March 31, |      |   | Increase/(Decrease) |   |       | %Change | 
|                                      |  | 2006                         |      |   | 2005                |   |       |        
|                                      |  | (Dollars in millions)        |      |   |                     |  
|Cash flows:                           |  |                              |      |   |                     |   |       |         |  |   |      |   |  |     |   
|Provided by operating activities      |  | $                            | 883  |   |                     | $ | 1,102 |         |  | $ | (219 | ) |  | (20 | )%
|Used for investing activities         |  |                              | (299 | ) |                     |   | (291  | )       |  |   | (8   | ) |  | (3  | )%
|Used for financing activities         |  |                              | (526 | ) |                     |   | (764  | )       |  |   | 238  |   |  | 31  | % 
|                                      |  |                              |      |   |                     |   |       |         |  |   |      |   |  |     |   
|Increase in cash and cash equivalents |  | $                            | 58   |   |                     | $ | 47    |         |  | $ | 11   |   |  | 23  | % 
|                                      |  |                              |      |   |                     |   |       |         |  |   |      |   |  |     |   



Operating
Activities



The decrease in cash provided by operating
activities was primarily attributable to a $197 million decrease in net income after adjusting for non-cash items and $73 million in income taxes paid to our parent during the quarter ended March 31, 2006.



Investing Activities



Our capital expenditures totaled $292 million and $250 million for the
quarter ended March 31, 2006 and 2005, respectively. The increase in capital expenditures was due primarily to increased spending for strategic products and outside plant, which includes network assets, such as cables, poles, equipment and
other components that are physically located outside of our company buildings.



Financing Activities



The decrease in cash used for financing activities was primarily attributable to decreased dividend payments made to QSC during the first quarter of 2006 as compared to the first quarter of 2005.



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Credit Ratings



The table below summarizes our long-term debt ratings at March 31, 2006 and December 31, 2005:



|        |  |    
|------- |  | ---
|Moodys |  | Ba3
|S&P     |  | BB 
|Fitch   |  | BB+



Debt ratings by the
various rating agencies reflect each agencys opinion of the ability of the issuers to repay debt obligations as they come due. In general, lower ratings result in higher borrowing costs and/or impaired ability to borrow. A security rating is
not a recommendation to buy, sell, or hold securities and may be subject to revision or withdrawal at any time by the assigning rating organization.



Given our current credit ratings, as noted above, our ability to raise additional capital under acceptable terms and conditions may be negatively
impacted.



Risk Management



We are exposed to market risks arising from changes in interest rates. The
objective of our interest rate risk management program is to manage the level and volatility of our interest expense. We may employ derivative financial instruments to manage our interest rate risk exposure.



As of March 31, 2006 and December 31, 2005, approximately $1.25
billion of our floating-rate debt was exposed to changes in interest rates. This exposure is linked to LIBOR. A hypothetical increase of 100 basis points in LIBOR would have been immaterial in the first quarter of 2006. As of March 31, 2006 and
December 31, 2005, we had approximately $90 million and $0, respectively, of long-term fixed rate debt obligations maturing in the subsequent 12 months. We are exposed to changes in interest rates at any time that we choose to refinance this
debt. A hypothetical 100 basis point increase in the interest rates on any refinancing of the current portion of long-term debt would not have a material effect on our earnings.



As of March 31, 2006, our proportionate share of QCIIs investments was $173 million of cash invested in money
market instruments and $41 million invested in short-term investments. Most cash investments are invested at floating rates. As interest rates change, so will the interest income derived from these instruments. Assuming that these investment
balances were to remain constant, a hypothetical decrease of 100 basis points in money market rates would not have had a material effect on our earnings.



Off-Balance Sheet Arrangements



There were no substantial changes to our off-balance sheet arrangements or contractual commitments in the three months ended March 31, 2006, when
compared to the disclosures provided in our Annual Report on Form 10-K for the year ended December 31, 2005.



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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS



This Form 10-Q contains or incorporates by reference forward-looking
statements about our financial condition, results of operations and business. These statements include, among others:



| |  |  | statements concerning the benefits that we expect will result from our business activities and certain transactions we have completed, such as increased revenue, decreased expenses
and avoided expenses and expenditures; and
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | statements of our expectations, beliefs, future plans and strategies, anticipated developments and other matters that are not historical facts.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------



These statements may be made expressly in this document or may be
incorporated by reference to other documents we have filed or will file with the Securities and Exchange Commission (SEC). You can find many of these statements by looking for words such as may, would,
could, should, plan, believes, expects, anticipates, estimates, or similar expressions used in this document or documents incorporated by reference in this document.



These forward-looking statements are subject to numerous
assumptions, risks and uncertainties that may cause our actual results to be materially different from any future results expressed or implied by us in those statements. Some of these risks are described in Risk Factors in Item 1A
of Part II of this report. These risk factors should be considered in connection with any subsequent written or oral forward-looking statements that we or persons acting on our behalf may issue. Given these uncertainties, we caution investors not to
unduly rely on our forward-looking statements. We do not undertake any obligation to review or confirm analysts expectations or estimates or to release publicly any revisions to any forward-looking statements to reflect events or circumstances
after the date of this document or to reflect the occurrence of unanticipated events. Further, the information about our intentions contained in this document is a statement of our intention as of the date of this document and is based upon, among
other things, the existing regulatory environment, industry conditions, market conditions and prices, the economy in general and our assumptions as of such date. We may change our intentions, at any time and without notice, based upon any changes in
such factors, in our assumptions or otherwise.



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK



The information under the caption Risk Management in Managements Discussion and Analysis of Financial Condition and Results of
Operations in Item 2 of Part I of this report is incorporated herein by reference.



ITEM 4. CONTROLS AND PROCEDURES



The effectiveness of our or any system of disclosure controls and procedures is subject to certain limitations, including the exercise of judgment in designing, implementing and evaluating the controls and procedures, the assumptions used
in identifying the likelihood of future events, and the inability to eliminate misconduct completely. As a result, there can be no assurance that our disclosure controls and procedures will detect all errors or fraud. By their nature, our or any
system of disclosure controls and procedures can provide only reasonable assurance regarding managements control objectives.



Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the
design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, or the Exchange Act) as of March 31, 2006. On the basis of this review, our
management, including our Chief Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedures are designed, and are effective, to give reasonable assurance that the information required to be disclosed by us in
reports that we file under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and to ensure that information required to be disclosed in the reports filed or submitted
under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, in a manner that allows timely decisions regarding required disclosure.



There were no changes in our internal control over financial reporting that
occurred in the first quarter of 2006 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.



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PART IIOTHER INFORMATION



ITEM 1. LEGAL PROCEEDINGS



The information contained in Note 4Commitments and Contingencies to our condensed consolidated financial statements in Item 1 of Part I of this report is hereby incorporated by reference.



ITEM 1A. RISK FACTORS



Risks Affecting
Our Business



Increasing competition, including product
substitution, continues to cause access line losses, which could adversely affect our operating results and financial performance.



We compete in a rapidly evolving and highly competitive market, and we expect competition to continue to intensify. We are facing greater competition in
our core local business from cable companies, wireless providers (including one of our affiliates), facilities-based providers using their own networks as well as those leasing parts of our network (UNEs), and resellers. In addition, regulatory
developments over the past few years have generally increased competitive pressures on our business. Due to these and other factors, we continue to lose access lines and are experiencing pressure on profit margins.



We seek to distinguish ourselves from our competitors by providing new or
expanded services such as high-speed Internet, packaging of expanded feature-rich products and improving the quality of our customer service. In addition, through joint marketing relationships with our affiliates, we are able to bundle our services
with wireless, long-distance, private line, and other services. However, we may not be successful in these efforts. We may not have sufficient resources to distinguish our service levels from those of our competitors, and we may not be successful in
integrating our product offerings. Even if we are successful, these initiatives may not be sufficient to offset our continuing loss of access lines. If these initiatives are unsuccessful or insufficient and our revenue declines significantly without
corresponding cost reductions, this will cause a significant deterioration to our results of operations and financial condition and adversely affect our ability to service debt and pay other obligations.



Consolidation among participants in the telecommunications industry may allow our
competitors to compete more effectively against us, which could adversely affect our operating results and financial performance.



The telecommunications industry is experiencing an ongoing trend towards consolidation, and several of our competitors have consolidated, or have
announced plans to consolidate, with other telecommunications providers. This trend may result in competitors that are larger and better financed and may afford our competitors increased resources and greater geographical reach, thereby enabling
such competitors to compete more effectively against us. We have begun to experience and expect further increased pressures as a result of this trend and in turn have been and may continue to be forced to respond with lower profit margin product
offerings and pricing plans in an effort to retain and attract customers. These pressures could adversely affect our operating results and financial performance.



Rapid changes in technology and markets could require substantial expenditure of financial and other resources in excess of
contemplated levels, and any inability to respond to those changes could reduce our market share.



The telecommunications industry is experiencing significant technological changes, and our ability to execute our business plans and compete depends upon
our ability to develop and deploy new products and services, such as broadband data and video services. The development and deployment of new products and services could require substantial expenditure of financial and other resources in excess of
contemplated levels. If we are not able to develop new products and services to keep pace with technological advances, or if such products and services are not widely accepted by customers, our ability to compete could be adversely affected and our
market share could decline. Any inability to keep up with changes in technology and markets could also adversely affect the trading price of our securities and our ability to service our debt.



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Third parties may claim we infringe upon their intellectual property rights, and defending against these claims
could adversely affect our profit margins and our ability to conduct business.



From time to time, we receive notices from third parties claiming we have or are infringing upon their intellectual property rights. We may receive similar notices in the future. Responding to these claims may require
us to expend significant time and money defending our use of affected technology, may require us to enter into royalty or licensing agreements on less favorable terms than we could otherwise obtain or may require us to pay damages. If we are
required to take one or more of these actions, our profit margins may decline. In addition, in responding to these claims, we may be required to stop selling or redesign one or more of our products or services, which could significantly and
adversely affect the way we conduct business.



Risks Relating to Legal and
Regulatory Matters



Any adverse outcome of the investigation of
QCIIs business currently being conducted by the DOJ or the material litigation pending against QCII and us, including the securities actions, could have a material adverse impact on our financial condition and operating results, on the trading
price of our debt securities and on our ability to access the capital markets.



The DOJ investigation and the remaining securities actions described in Note 4Commitments and Contingencies to our condensed consolidated financial statements in Item 1 of Part I of this report present
material and significant risks to QCII and us. In the aggregate, the plaintiffs in the remaining securities actions and persons who have sought exclusion from the class in the consolidated securities action seek billions of dollars in damages, and
the outcome of one or more of these matters or the DOJ investigation could have a negative impact on the outcomes of the other actions. Further, the size, scope and nature of the restatements of QCIIs consolidated financial statements for 2001
and 2000, which are described in QCIIs Annual Report on Form 10-K/A for the fiscal year ended December 31, 2002, affect the risks presented by these actions and the DOJ investigation, as these matters involve, among other things,
QCIIs prior accounting practices and related disclosures. Plaintiffs in certain of the securities actions have alleged QCIIs restatement of items in support of their claims. QCII and we continue to defend against the remaining securities
actions vigorously and are currently unable to provide any estimate as to the timing of their resolution.



We can give no assurance as to the impacts on QCIIs and our financial results or financial condition that may ultimately result from all of these
matters. QCII has a recorded reserve in its financial statements for the minimum estimated amount of loss it believes is probable with respect to the remaining securities actions described in Note 4Commitments and Contingencies to our
condensed consolidated financial statements in Item 1 of Part I of this report, as well as to any additional actions that may be brought by parties that, as described under Additional Opt-Out Parties in Note 4, have more recently
requested to be excluded from the proposed settlement of the consolidated securities action. However, the ultimate outcomes of these matters are still uncertain and the amount of loss QCII ultimately incurs could be substantially more than the
reserves it has provided. If the recorded reserves are insufficient, QCII will need to record additional charges to its consolidated statement of operations in future periods. In addition, any settlement of or judgment in one or more of these
actions substantially in excess of QCIIs recorded reserves could have a significant impact on QCII and us, and we can give no assurance that QCII and we will have the resources available to pay any such judgment. The magnitude of any
settlement or judgment resulting from these matters could materially and adversely affect QCIIs ability to meet its debt obligations and its financial condition, potentially impacting its credit ratings, its ability to access capital markets
and its compliance with debt covenants. In addition, the magnitude of any settlement or judgment may cause QCII to draw down significantly on its cash balances, which might force it to obtain additional financing or explore other methods to generate
cash. Such methods could include issuing additional securities or selling assets. As a wholly owned subsidiary of QCII, our business operations and financial condition would be similarly affected.



Further, there exist other material proceedings pending against QCII and us
as described in Note 4Commitments and Contingencies to our condensed consolidated financial statements in Item 1 of Part I of this



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report, which, depending on their outcome, may have a material adverse effect on QCIIs and our financial position. Thus, we can give no assurances as
to the impacts on QCIIs and our financial results or financial condition as a result of these matters.



Current or future civil or criminal actions against QCIIs former officers and employees could reduce investor confidence in QCII and us and cause the trading price for our debt securities to decline.



As a result of QCIIs past accounting issues,
investor confidence in QCII and us has suffered and could suffer further. Although QCII has consummated a settlement with the SEC concerning its investigation of QCII, in March 2005, the SEC filed suit against QCIIs former chief executive
officer, Joseph Nacchio, two of QCIIs former chief financial officers, Robert Woodruff and Robin Szeliga, and other former QCII officers and employees. In December 2005, a criminal indictment was filed against Mr. Nacchio charging him
with 42 counts of insider trading. In July 2005, Ms. Szeliga pleaded guilty to a criminal charge of insider trading. In December 2005, Marc Weisberg, a former QCII executive, pleaded guilty to a criminal charge of wire fraud. Other former
officers or employees of QCII have entered into settlements with the SEC involving civil fraud or other claims in which they neither admitted nor denied the allegations against them.



A trial could take place in the pending SEC lawsuit against Mr. Nacchio and others and in connection with the criminal
charges against Mr. Nacchio. Evidence introduced at such trials and in other matters may result in further scrutiny by governmental authorities and others. The existence of this heightened scrutiny could adversely affect investor confidence in
QCII and us and cause the trading price for our debt securities to decline.



We operate in a highly regulated industry, and are therefore exposed to restrictions on our manner of doing business and a variety of claims relating to such regulation.



Our operations are subject to significant federal regulation, including the
Communications Act of 1934, as amended, and Federal Communications Commission, or FCC, regulations thereunder. We are also subject to the applicable laws and regulations of various states, including regulation by public utility commissions, or PUCs,
and other state agencies. Federal laws and FCC regulations generally apply to regulated interstate telecommunications (including international telecommunications that originate or terminate in the United States), while state regulatory authorities
generally have jurisdiction over regulated telecommunications services that are intrastate in nature. The local competition aspects of the Telecommunications Act of 1996 are subject to FCC rulemaking, but the state regulatory authorities play a
significant role in implementing those FCC rules. Generally, we must obtain and maintain certificates of authority from regulatory bodies in most states where we offer regulated services and must obtain prior regulatory approval of rates, terms and
conditions for our intrastate services, where required. Our businesses are subject to numerous, and often quite detailed, requirements under federal, state and local laws, rules and regulations. Accordingly, we cannot ensure that we are always in
compliance with all these requirements at any single point in time. The agencies responsible for the enforcement of these laws, rules and regulations may initiate inquiries or actions based on their own perceptions of our conduct, or based on
customer complaints.



Regulation of the telecommunications
industry is changing rapidly, and the regulatory environment varies substantially from state to state. Recently a number of state legislatures and state PUCs adopted reduced or modified forms of regulation for retail services. This is generally
beneficial to us because it reduces regulatory costs and regulatory filing and reporting requirements. These changes also generally allow more flexibility for new product introduction and enhance our ability to respond to competition. At the same
time, some of the changes, occurring at both the state and federal level, may have the potential effect of reducing some regulatory protections, including having FCC-approved tariffs that include rates, terms and conditions. These changes may
necessitate the need for customer-specific contracts to address matters previously covered in our tariffs. Despite these regulatory changes, a substantial portion of our local voice services revenue remains subject to FCC and state PUC pricing
regulation, which could expose us to unanticipated price declines. There can be no assurance that future regulatory, judicial or legislative activities will not have a material adverse effect on our operations, or that regulators or third parties
will not raise material issues with regard to our compliance or noncompliance with applicable regulations.



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All of our operations are also subject to a variety of environmental, safety, health and other
governmental regulations. We monitor our compliance with federal, state and local regulations governing the discharge and disposal of hazardous and environmentally sensitive materials, including the emission of electromagnetic radiation. Although we
believe that we are in compliance with such regulations, any such discharge, disposal or emission might expose us to claims or actions that could have a material adverse effect on our business, financial condition and operating results.



Risks Affecting Our Liquidity



QCIIs high debt levels pose risks to our viability and may make us more
vulnerable to adverse economic and competitive conditions, as well as other adverse developments.



Our ultimate parent, QCII, is highly leveraged on a consolidated basis. As of March 31, 2006, our consolidated debt was approximately $7.7 billion,
which was included in QCIIs consolidated debt of $15.4 billion as of that date. Approximately $2.8 billion of QCIIs and our debt obligations comes due over the next three years. In addition, holders of QCIIs $1.265 billion
3.50% Convertible Senior Notes due 2025 may elect to convert the principal of their notes into cash if specified, market-based conversion requirements are met in the future. QCII does not anticipate holders would make such an election, however,
because QCII believes it would likely result in adverse economic consequences to such holders. While we currently believe QCII and we will have the financial resources to meet our obligations when they come due, we cannot anticipate what QCIIs
and our future condition will be. We may have unexpected costs and liabilities and we may have limited access to financing.



We may periodically need to obtain financing in order to meet our debt obligations as they come due. We may also need to obtain additional financing or
investigate other methods to generate cash (such as further cost reductions or the sale of assets) if revenue and cash provided by operations decline, if economic conditions weaken, if competitive pressures increase or if QCII or we become subject
to significant judgments, settlements and/or tax payments as further discussed in Note 4Commitments and Contingencies to our condensed consolidated financial statements in Item 1 of Part I of this report and in Managements
Discussion and Analysis of Financial Condition and Results of OperationsLiquidity and Capital Resources in Item 2 of Part I of this report. We can give no assurance that such additional financing will be available on terms that are
acceptable. Also, we may be impacted by factors relating to or affecting our liquidity and capital resources due to perception in the market, impacts on our credit ratings or provisions in our financing agreements that may restrict our flexibility
under certain conditions.



In addition, QSCs five-year
$850 million revolving credit facility (referred to as the 2005 QSC Credit Facility), which is currently undrawn, has a cross payment default provision, and the 2005 QSC Credit Facility and certain other debt issues of QCII and its other
subsidiaries have cross acceleration provisions. When present, such provisions could have a wider impact on liquidity than might otherwise arise from a default or acceleration of a single debt instrument. As a wholly owned subsidiary of QCII and
QSC, any such event could adversely affect our ability to conduct business or access the capital markets and could adversely impact our credit ratings. In addition, the 2005 QSC Credit Facility contains various limitations, including a restriction
on using any proceeds from the facility to pay settlements or judgments relating to the DOJ investigation and securities actions discussed in Note 4Commitments and Contingencies to our condensed consolidated financial statements in Item 1
of Part I of this report.



Our high debt levels could adversely
impact our credit ratings. Additionally, the degree to which we, together with QCII, are leveraged may have other important limiting consequences, including the following:



| |  |  | placing us at a competitive disadvantage as compared with our less leveraged competitors;
| | - |  | -----------------------------------------------------------------------------------------



| |  |  | making us more vulnerable to downturns in general economic conditions or in any of our businesses;
| | - |  | --------------------------------------------------------------------------------------------------



| |  |  | limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------



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| |  |  | impairing our ability to obtain additional financing in the future for working capital, capital expenditures or general corporate purposes.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------



We may be unable to significantly reduce the substantial capital requirements or
operating expenses necessary to continue to operate our business, which may in turn affect our operating results.



The industry in which we operate is capital intensive, and as such we anticipate that our capital requirements will continue to be significant in the
coming years. Although we have reduced our capital expenditures and operating expenses over the past few years, we may be unable to further significantly reduce these costs, even if revenue is decreasing. While we believe that our current level of
capital expenditures will meet both our maintenance and our core growth requirements going forward, this may not be the case if circumstances underlying our expectations change.



Declines in the value of QCIIs qualified pension plan assets, or unfavorable changes in laws or regulations that govern pension
plan funding, could require it to provide significant amounts of funding for its qualified pension plan.



Our employees participate in a qualified defined benefit pension plan sponsored by QCII. While QCII does not expect to be required to make material cash
contributions to its qualified defined benefit pension plan in the near term based upon current actuarial analyses and forecasts, a significant decline in the value of qualified pension plan assets in the future or unfavorable changes in laws or
regulations that govern pension plan funding could materially change the timing and amount of required pension funding. As a result, QCII and we may be required to fund QCIIs qualified defined benefit pension plan with cash from operations,
perhaps by a material amount. Also, recognition of an additional minimum liability caused by changes in pension plan assets or measurement of the accumulated benefit obligation could have a material impact on its consolidated balance sheet. As an
example, if QCIIs accumulated benefit obligation exceeds pension plan assets in the future, the impact would be to eliminate QCIIs prepaid pension asset, which was $1.165 billion as of December 31, 2005, and record a pension
liability for the amount that its accumulated benefit obligation exceeds pension plan assets with a corresponding charge to other comprehensive loss, thereby increasing stockholders deficit. Alternatively, QCII could make a voluntary
contribution to the plan so that the qualified pension plan assets exceed the accumulated benefit obligation. As of December 31, 2005, QCIIs qualified pension plan assets exceed its accumulated benefit obligation by $596 million.



The cash needs of our affiliated companies consume a significant amount
of the cash we generate.



We regularly declare and pay
dividends to our direct parent, QSC. We may declare and pay dividends in excess of our earnings to the extent permitted by applicable law, which may consume a significant amount of the cash we generate. Our debt covenants do not limit the amount of
dividends we can pay to our parent.



Our debt agreements and the debt
agreements of QCII allow us and QCII to incur significantly more debt, which could exacerbate the other risks described herein.



The terms of QCIIs and our debt instruments permit both QCII and us to incur additional indebtedness. Such additional debt may be necessary for many
reasons, including to adequately respond to competition, to comply with regulatory requirements related to our service obligations or for financial reasons alone. Incremental borrowings or borrowings at maturity on terms that impose additional
financial risks to our various efforts to improve our financial condition and results of operations could exacerbate the other risks described herein.



Other Risks Relating to Qwest



If conditions or assumptions differ from the judgments, assumptions or estimates used in our critical accounting policies, the accuracy of our financial statements
and related disclosures could be affected.



The
preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States, or GAAP, requires management to make judgments, assumptions and



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estimates that affect the amounts reported in our consolidated financial statements and accompanying notes. Our critical accounting policies, which are
described in our 2005 Form 10-K, describe those significant accounting policies and methods used in the preparation of our consolidated financial statements that are considered critical because they require judgments, assumptions and
estimates that materially impact our consolidated financial statements and related disclosures. As a result, if future events differ significantly from the judgments, assumptions and estimates in our critical accounting policies, such events or
assumptions could have a material impact on our consolidated financial statements and related disclosures.



Taxing authorities may determine we owe additional taxes relating to various matters, which could adversely affect our financial results.



We are included in the consolidated federal income tax return of QCII. As such, we could be severally liable for tax
examinations and adjustments attributed to other members of the QCII affiliated group. As a significant taxpayer, QCII is subject to frequent and regular audits from the Internal Revenue Service, or IRS, as well as from state and local tax
authorities. These audits could subject us to risks due to adverse positions that may be taken by these tax authorities. Please see Note 4Commitments and Contingencies to our condensed consolidated financial statements in Item 1 of Part I
of this report for examples of legal proceedings involving some of these adverse positions. For example, in the fourth quarter of 2004, QCII received notices of proposed adjustments on several significant issues for the 1998-2001 audit cycle.
Certain of these proposed adjustments are before the Appeals Office of the IRS. There is no assurance that QCII and the IRS will achieve settlements on these issues or that, if QCII does achieve settlements, the terms will be favorable to QCII.
Additionally, the IRS is reviewing QCIIs tax treatment of the sale of its DEX directory publishing business in the 2002-2003 audit cycle.



Because prior to 1999, QCII was a member of affiliated groups filing consolidated U.S. federal income tax returns, QCII could be severally liable for tax
examinations and adjustments not directly applicable to current members of the QCII affiliated group. Tax sharing agreements have been executed between QCII and previous affiliates, and QCII believes the liabilities, if any, arising from adjustments
to tax liability would be borne by the affiliated group member determined to have a deficiency under the terms and conditions of such agreements and applicable tax law. QCII has recognized in its financial statements certain amounts owed to it under
one of these agreements; however, generally, QCII has not provided for liabilities of former affiliated members or for claims they have asserted or may assert against QCII.



While QCII believes its tax reserves adequately provide for the associated tax contingencies, QCIIs tax audits and
examinations may result in tax liabilities that differ materially from those QCII has recorded in its consolidated financial statements. Also, the ultimate outcomes of all of these matters are uncertain, and QCII can give no assurance as to whether
an adverse result from one or more of them will have a material effect on QCIIs financial results, including potentially offsetting a significant portion of its existing net operating losses, which could affect our financial condition and
operating results to the extent the matters affect us.



If we fail to
extend or renegotiate our collective bargaining agreements with our labor unions as they expire from time to time, or if our unionized employees were to engage in a strike or other work stoppage, our business and operating results could be
materially harmed.



We are a party to collective
bargaining agreements with our labor unions, which represent a significant number of our employees. In August 2005, we reached agreements with the Communications Workers of America and the International Brotherhood of Electrical Workers on
three-year labor agreements. Each of these agreements was ratified by union members and expires on August 16, 2008. Although we believe that our relations with our employees are satisfactory, no assurance can be given that we will be able to
successfully extend or renegotiate our collective bargaining agreements as they expire from time to time. The impact of future negotiations, including changes in wages and benefit levels, could have a material impact on our financial results. Also,
if we fail to extend or renegotiate our collective bargaining agreements, if disputes with our unions arise, or if our unionized workers engage in a strike or other work stoppage, we could incur higher ongoing labor costs or experience a significant
disruption of operations, which could have a material adverse effect on our business.



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ITEM 6. EXHIBITS



Exhibits
filed for Qwest through the filing of this Form 10-Q:



Exhibits identified in parentheses below are on file with the SEC and are incorporated herein by reference. All other exhibits are provided as part of this electronic submission.



|            |   |  |                                                                                                                                                                                                                                                                                                    
|----------- | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |   |  | Description                                                                                                                                                                                                                                                                                        
|(3.1        | ) |  | Restated Articles of Incorporation of Qwest Corporation (incorporated by reference to Qwest Corporations Annual Report on Form 10-K for the year ended December 31, 1997, File
No. 001-03040).                                                                                                    
|            |  
|(3.2        | ) |  | Articles of Amendment to the Articles of Incorporation of Qwest Corporation (incorporated by reference to Qwest Corporations Quarterly Report on Form 10-Q for the quarter ended
June 30, 2000, File No. 001-03040).                                                                              
|            |  
|(3.3        | ) |  | Amended and Restated Bylaws of Qwest Corporation (incorporated by reference to Qwest Corporations Annual Report on Form 10-K for the year ended December 31, 2002, File
No. 001-03040).                                                                                                           
|            |  
|(4.1        | ) |  | Indenture, dated as of April 15, 1990, by and between Mountain States Telephone and Telegraph Company and The First National Bank of Chicago (incorporated by reference to Qwest
Corporations Annual Report on Form 10-K for the year ended December 31, 2002, File No. 001-03040).               
|            |  
|(4.2        | ) |  | First Supplemental Indenture, dated as of April 16, 1991, by and between U S WEST Communications, Inc. and The First National Bank of Chicago (incorporated by reference to
Qwest Corporations Annual Report on Form 10-K for the year ended December 31, 2002, File No. 001-03040).              
|            |  
|(4.3        | ) |  | Indenture, dated as of October 15, 1999, by and between U S West Communications, Inc. and Bank One Trust Company, N.A. (incorporated by reference to Qwest
Corporations Annual Report on Form 10-K for the year ended December 31, 1999, File No. 001-03040).                                     
|            |  
|(4.4        | ) |  | Officers Certificate of Qwest Corporation, dated as of March 12, 2002 (including forms of 87/8% notes due March 15, 2012) (incorporated by reference to Qwest Corporations Form S-4, File No. 333-115119).                                                                                       
|            |  
|(4.5        | ) |  | First Supplemental Indenture, dated as of August 19, 2004, by and between Qwest Corporation and U.S. Bank National Association (incorporated by reference to Qwest
Communications International Inc.s Quarterly Report on Form 10-Q for the quarter ended September 30, 2004, File No. 001-15577).
|            |  
|(4.6        | ) |  | Second Supplemental Indenture, dated as of November 23, 2004, by and between Qwest Corporation and U.S. Bank National Association (incorporated by reference to Qwest
Corporations Current Report on Form 8-K filed November 23, 2004, File No. 001-03040).                                       
|            |  
|(4.7        | ) |  | Third Supplemental Indenture, dated as of June 17, 2005, by and between Qwest Corporation and U.S. Bank National Association (incorporated by reference to Qwest Corporations Current
Report on Form 8-K filed June 23, 2005, File No. 001-03040).                                                
|            |  
|(10.1       | ) |  | Registration Rights Agreement, dated August 19, 2004, among Qwest Corporation and the initial purchasers listed therein (incorporated by reference to Qwest Communications International
Inc.s Quarterly Report on Form 10-Q for the quarter ended September 30, 2004, File No. 001-15577).       
|            |  
|(10.2       | ) |  | Registration Rights Agreement, dated November 23, 2004, by and among Qwest Corporation and the initial purchasers listed therein (incorporated by reference to Qwest Corporations
Current Report on Form 8-K dated November 18, 2004, File No. 001-03040).                                        



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|            |   |  |                                                                                                                                                                                                                                                    
|----------- | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |   |  | Description                                                                                                                                                                                                                                        
|            |  
|(10.3       | ) |  | Registration Rights Agreement, dated June 17, 2005, by and among Qwest Corporation and the initial purchasers listed therein (incorporated by reference to Qwest Corporations Current
Report on Form 8-K filed June 23, 2005, File No. 001-03040).
|            |  
|12          |   |  | Calculation of Ratio of Earnings to Fixed Charges.                                                                                                                                                                                                 
|            |  
|31.1        |   |  | Chief Executive Officer Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                   
|            |  
|31.2        |   |  | Chief Financial Officer Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                   
|            |  
|32          |   |  | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                            

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|(    ) | Previously filed.
|------ | -----------------



In accordance with Item 601(b)(4)(iii)(A) of Regulation S-K, copies of certain instruments defining the rights of holders of certain of our long-term
debt are not filed herewith. Pursuant to this regulation, we hereby agree to furnish a copy of any such instrument to the SEC upon request.



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SIGNATURE



Pursuant to the
requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



QWEST CORPORATIONBy:

/S/    JOHN W. RICHARDSONJohn W. RichardsonSenior Vice President and Controller(Duly Authorized Officer and Chief Accounting
Officer)




May 3, 2006



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